Enterprise Hub Network - Case History
Aylesbury Vale Enterprise Hub
Martin Brassell
Pricing your new product or service
Martin Brassell, hub director at the SEEDA Enterprise Hub Network, offers advice on how to go about setting prices for a new product or service.
Pricing is often described as an art, not a science: and there's a lot of truth in that statement.
Certainly, for many "me-too" products and services, you can, and should, analyse your competition and determine where the current market price begins and ends. Then you can look at your costs and desired margin, and with a bit of luck, find a convenient point somewhere between floor and ceiling. Job done.
Or is it? Don't be too surprised if on launch day you still end up feeling like Indiana Jones towards the climax of The Last Crusade, where Harrison Ford has to make a 'leap of faith' by jumping onto a bridge he can't see.
Even in fiercely competitive markets, price setting may not rely as much on science as it appears. Consider the care with which supermarkets set out detailed comparisons with their competitors across thousands of in-store prices. Yet this is just a mechanical process: the clever bit is the policy behind it – working out which aspects of the offer need to be directly comparable, and which can afford to be different, in order to attract the customer.
Where do you start when you have to price an innovative new product or service that has few, if any, competitors? The biggest mistake new businesses can make, and all too frequently do, is falling into the trap of thinking that there is no competition. Your potential customers always have an alternative, even if that alternative is doing nothing. Usually they have several.
So here are some pointers that might assist you when you are battling with this dilemma:
- Rather than competitors, think about comparators – other relevant expenditure your target customers incur that they might compare with your product. Pricing comparatively with similar products can give customers perspective and highlight the benefits your company can provide in a manner to which they can relate. For example a pre-purchase data check for a car may appear expensive at £40, but it looks much better value when you realise it costs less than the first tank of fuel will.
- How difficult will your new product be for rivals to duplicate? It is important to review your position in the market and decide whether you would be best off selling fewer products at a higher profit margin or more at a lower one. If what you're selling is unique and well protected, you may be able to hold out for a high price and high margin and live with the fact that sales may take longer. If on the other hand barriers to entry are low and/or you are targeting a mass "repeat purchase" market, then low pricing and expanding your customer base rather than aiming for early profitability is probably a more desirable strategy, if you can afford it.
- Consider how you want your brand to be perceived. Are you going to emphasise premium quality or value for money? If your product is demonstrably better in quality or more feature-rich than the competition, it makes sense to seek to command a higher price for it. Also, history shows it is very hard for "value" brands to reposition themselves as "premium" ones but it is possible for prestige brands to bring out products at lower cost. Tesco manage this trick extremely well with the Tesco Finest brand co-existing alongside the Tesco Value brand.
- Large enterprises place a great deal of emphasis on the average cost of acquiring a new customer, mainly because selling to new customers is generally reckoned to cost at least five times as much as selling to existing ones. Corporations tend to justify this expense, usually advertising, marketing and sales commissions, by looking at that client's expected lifetime value. Small businesses should operate on the same principle, accepting initial reductions in profit in order to secure long term clients. Of the range of incentives at your disposal, judicious use of free products can often prove to be the cheapest and most effective tool in your armoury for attracting new clients. For example, by offering a month's free service, an IT consultancy may find itself providing IT solutions to a company for several years.
- Developing that further, be sure to tread carefully with "introductory discounts". While these are frequently used, they can cause you problems when trying to re-set price expectations at the end of your promotional period. It is sometimes preferable to offer a free trial, thus removing price as an objection, and allowing prospects to try your product at low or reduced risk to themselves, in the knowledge of your intended future price (and this also gives the trial a perceived value).
- If you're not sure that you can achieve your desired price in one go, consider whether you can deconstruct the product into components. You can expand your customer base by selling your basic product or service, or the elements for which you anticipate the greatest demand, at a lower price. You may then be able to increase your profit by adding value to the product or service, which your now committed customer will find hard to resist, thus increasing your average transaction values. For a perfect example, look at eBay; the range of cost options provided is so tempting that it's difficult to end up paying the cheapest price.
- Some products can justify their pricing on the back of the efficiency benefits or cost savings they deliver to customers. This can be a valuable marketing tool, but when seeking to use this as a sales argument, be certain that your customer is really in a position to take advantage of the savings you think you have identified. Many labour-saving devices, for example, have failed to sell because the business is obliged to retain the labour in question for other reasons.
Cash is vital to any small business, and at launch time that consideration applies to expenditure even more than it does to sales incomes, simply because it's under your control. Therefore, before casting your sprat into the water to catch your mackerel – make sure that the mackerel are hungry!
About the author
Martin Brassell is a hub director with the SEEDA Enterprise Hub Network, which helps the South East's high potential entrepreneurial businesses to get off to the best possible start through coaching, access to finance, market intelligence and support with intellectual property.
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