Key Takeaways
- Finding the optimum price is both art and science.
- You need to understand consumer and competitor behaviour.
- Your cost of producing the item is key.
- Watch your competitors, but don't copy them.
- Customer value is created in their minds.
Pricing is one of the trickiest marketing elements to get right. Is my price too high? Am I leaving money on the table? Entrepreneurs frequently face the issue of how to price a unique product with little comparison to similar ones. You may have witnessed some services priced free (like Grammarly), and then you are asked to upgrade to a premium product. Others are based on a fixed price but an extra charge if some usage is above a certain level. This pricing act sounds complicated. Is there a metric to arrive at the optimum price?
Pricing is essential as it directly affects your sales and profit more than your other marketing mix elements. Unlike your product, pricing may change frequently, especially if you are an e-commerce business. You can change prices in different territories simultaneously without much cost. Pricing is both an art and a science. Some internet companies use machine learning to look at competitors' prices and adjust accordingly. However, these simple heuristics can ignore your brand and customer preferences.
Pricing strategy
The big picture is where you should start formulating your strategy. A pricing strategy for a single-line product firm is far less complicated than a supermarket with ten thousand stock-keeping units (SKUs). I once worked at an international corporation that operated in global markets and had a pricing structure for my Caribbean region. However, the Caribbean word is a misnomer—Barbados is different from Jamaica, as both were dissimilar to Suriname. These differences meant my pricing structure was frequently out of line with Latin America.
Pricing should also consider the other marketing mixes. Your product strategy will influence your pricing if you sell an economy instead of a premium item. Some items can be sold at cost even though it is unprofitable. This loss leader way is the supermarket pricing strategy, as they know that shoppers are aware of critical items such as flour, ketchup and two-litre soft drinks. They use these to gauge the overall price the supermarket is charging. However, there is no way grocery buyers can process the price of thousands of SKUs, so it is a game of psychology. Supermarkets such as Massy Stores (Trinidad and Tobago's store chain) offer much more than a few items; they offer a large bundle of goods (grocery, produce, deli, bakery, pharmacy, meats, frozen foods, and cooked foods) plus money payment services. In other words, if you are time-poor, even if some prices are high and you know it, hopping around is not worth it.
Cost plus pricing
Let us keep it simple. The first thing you want to know is the item's actual cost. If you do not have an accounting brain, you may not need one. Apart from accounting software, you can use an MS Excel spreadsheet to estimate each component's cost. Do not forget to include the depreciation on the machine if it is a product. Small entrepreneurs often use depreciation funds, thinking they are profits and spending them.
With your item cost, the next step is to decide on the mark-up. Mark-up can be negative, as flour and rice are sometimes priced at a sale in supermarkets. It can be zero or positive. Sometimes, in the fashion business, it can be dynamic. The clothes stores will start with a high price when the pants are trending and gradually lower the price. When you go to the bargain section, the items have already achieved their profit target. It also makes no sense to keep a slow-moving item, not justifying its expensive shelf space.
Services are like a ghost in the machine. While you can cost the time it takes to perform the act plus the material cost and other expenses, it can depend on the beholder's perception. We deal with this later.
Competitive Pricing
Consumers like to compare prices. If your similar item is overpriced, the game is over. However, you can charge a premium if your bake has more coconut. Some firms like PriceSmart charge a lower price by asking you to buy bigger sizes, so the unit cost is lower. However, they never include the membership cost. Warehouse retailers can back up their low-cost strategy by using machines to replenish the shelves and a spartan environment. Mini marts, on the other hand, find themselves between the chain supermarkets and the wholesale clubs. We recognise the higher prices, but who is going to town and facing the traffic for a runout item?
Services can be a pain to price if they are perceived as commodities. Tax filing or website building services can have a standard price. However, this can be the hook to upsell, and your KFC attendant is a master of this strategy. Services have the potential for differentiation as the person providing the service might have unique skills, and you may perceive her as the most outstanding eye specialist.
Customer value pricing
If you think pricing a service is challenging, try gauging what customers will pay. Would you go for the cheapest cataract operation with an unknown doctor? In India, cataract surgery costs about US$10 but is still out of the reach of many. It is the leading cause of blindness for 80% of the population. This results in significant disability for millions of Indians.
Dr. Govindappa Venkataswamy, a skilled ophthalmologist, understood the problem, founded Aravind Eye Care, and wanted to scale up and deal with people who could not afford the surgery. He was quoted as saying: "If Coca-Cola can sell billions of sodas and McDonald's can sell billions of burgers, why can't Aravind sell millions of sight-restoring operations….. people could be freed from hunger, fear, and poverty."
The artificial intraocular lens (IOL) is a significant input into the surgery cost. Dr. Venkataswamy set up his own company, Autolab, to produce the IOL for about US$3. This strategy meant people experiencing poverty would get the operation for a few dollars or free. The more affluent clients can buy the more expensive lens, subsidising the cost and making the hospital operation sustainable.
Dr. Venkataswamy's strategy is creating a social enterprise that can use entrepreneurship to tackle a social issue. The pricing mechanism is quite different from what the private sector uses. If you have plans to deal with crime or poverty, this approach offers insight into how to cure a wicked problem sustainably.
Pricing can make or break your financial success. However, understand that pricing strategy is part of your master plan, and it should work in alignment with it. In a world where customers can quickly Google prices, be sure you can respond as rapidly as possible. Finally, note that your brand can be a formidable countervailing force to any pricing attack.
Sajjad Hamid, Author and Newspaper columnist
Sajjad is an SME and Family Business Advisor who supports entrepreneurs in scaling their ventures. In his spare time in Trinidad and Tobago, he tries to produce organic tropical fruits and vegetables and practise sustainable farming in his home garden.
His book combines entrepreneurship and family enterprise like no other. Build Your Legacy Business: Solopreneur To Family Business Hero.
You can contact him at [email protected] or www.entrepreneurtnt.com
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