A lot of theory and proven practice go into effectively pricing your product or service, starting with your overall strategy (skimming, harvesting, or penetration). If the names alone don’t make the strategies clear to you, here are quick-and-dirty definitions:
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If short-run profits are your goal because you have a ”pioneer” position, then you probably want to adopt a skimming price policy—which means you’ll set your price high.
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If short-run profits are your goal because of a decling market, then you probably want to adopt a harvesting price policy–which means you’ll set your price high and simultaneously cut costs.
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If sales rate and/or market share are your focus, then you probably want to adopt a penetration price policy—which means you’ll set your price relatively low.
Once you’ve figured out the right strategy for your particular situation, you have two options for calculating your actual price. You can approach the task from a desired retail price angle or from a cost angle. (Whichever you choose, you should “sanity check” your results from the opposite angle.)
Taking the desired retail price angle means you’ll base your decision on demand and competitive considerations; then, if you have channel partners, you’ll back through all channel margins to establish your price to the trade. Taking the cost angle means you’ll base your decision on your break-even analysis (the point at which your product or service stops costing you money to produce/sell, and starts to generate a profit).
Once you’ve calculated and “sanity-checked” your price, you’d be wise to generate a simple cash flow statement to see if you can actually meet all your business goals at that price. Then, keep an eye on your market and competition, because odds are you’ll need to adjust your price over time (you might even want to plan on price adjustments up front, when you figure your initial price).
It all sounds simple and it pretty much is, but you would do well to enlist the help of one or more seasoned professionals with marketing and accounting expertise. Good luck!
This post first appear in Percolating! by Kup & Sourcer (www.kupandsourcer.com/blog) on August 8, 2007.