Determining the Perfect Selling Price

April, 2006

We regularly hear from our customers that they find it difficult to determine how to price their product or service. We'll try to de-mystify the pricing process and provide some criteria for establishing the perfect price for your product or service.

Factors to Consider

The perfect price is first determined by the priority you place on capturing market share or obtaining a short-term increase in profits. Making this determination can be affected by the market life cycle or other internal factors revolving around the overall corporate strategy. Since the corporate strategy factor varies with every company, we will focus on the more global issue of market conditions.

Let's consider a declining market where sales are dropping and competitors are dropping out of the market. If you were selling a technically sophisticated product that required considerable customer support, it would be very costly to sell this product for a low price. At the lower price you would be attracting a customer base with greater support needs, thereby reducing profits. The declining market is also working against you with a decreasing customer base making it impossible to "make it up in volume." However, it is also difficult to price high in a declining market unless several other factors are in your favor, such as:

  • Prospects consider factors other than price in their purchase decision
  • You provide one of the few choices for prospects
  • Your competitors are in a weak position
  • Your sales potential, controlled by numerous internal and external factors, is strong

    This is obviously a tough position but can be managed with the right objectives.

    Now let's talk about a good position, one that allows for flexibility in your pricing model. If you are in the early stages of the market's life cycle, using leading edge technology and are one of the few providers available, then you are in a great position to price high. Of course, you need to have a strong sales potential and it's always easier if the prospects are not price sensitive when considering your type of product.

    Even under the best circumstances there are factors that can restrict your pricing flexibility. Government controls, your pricing history, the portion of the prospects budget you require and many other factors play an integral role.

    Price and value are two of the critical elements of the positioning of your product or service in the market. This chart illustrates the relationship between them and the implications of your position to the success of your business.

    In this example you provide a significant value and are priced just below your competition. This price position is ideal for market penetration. If you are in the early market stages, this strategy is most appropriate. In the long-term, the profits go to the companies with the market share leadership, so your pricing is consistent with achieving that position.

    There are literally hundreds of factors to consider when pricing your product or service, too many to mention here and too difficult to portray all potential scenarios in a newsletter. If you are struggling with pricing you may want to consider using our Plan Write for Pricing tool. It provides an interview process asking the pertinent questions then evaluates your situation to help you determine the optimal price. For more information or a product demo click here.