Take the guesswork out of pricing and optimize profitability.
Pricing products where there isn’t competition yet can be a difficult thing to do. And…
Pricing products where there isn’t competition yet can be a difficult thing to do. And the answer to the question changes based on whether you’re in a B2C or B2B environment.
If you’re B2B, you want to figure out the economic value of your solution relative to the solution your market is currently using. That means determining whatever true dollars and cents that a company makes, either earned or saved, using your solution vs. without your solution.
As a rule of thumb, you should expect to get 10 percent of whatever that economic value is. It’s not higher, because you’re asking somebody to take a risk with your revolutionary product. Let’s say you’re telling customers that your product will save them $1 million. They don’t have proof, so they’re taking a risk to see if it’s actually going to pan out or not. They might be willing to pay $100,000 for a $1-million gain, because of the size of the risk.
If you’re in B2C markets or B2B markets where you can’t calculate the economic value for your customers, then you have to find another way to determine what your customers are willing to pay.
Under no circumstances, however, should you ask your customer how much they are willing to pay. Instead try the following questions: How much would you expect to pay for this? How much do you think other people would pay for this? Or you could use a scientific approach like Van Westendorp’s price sensitivity meter, which uses a series of questions to determine what potential customers are willing to pay.
Once you’ve figured out the value of what your customers would be willing to pay for your product, then you have a tough decision to make. Do you want to skim or penetrate the markets?
Skimming the market involves trying to capture the customers that are willing to pay the most first, and then slowly bringing your price down to capture more customers.
Penetrating the markets involves starting with a very low, aggressive price to get more people to jump in early.
In general, a skimming strategy is better if you have a monopolistic position and you don’t expect competition to be coming in quickly. However, if you expect competition to come in quickly or if it makes a lot of sense to have a huge marketplace, then you probably want to incorporate a penetration strategy.
The 10 percent of economic value is really just the marker to put in the ground, before determining which of the two strategies to go with. You should also take into consideration what your expectations are for future competition and how fast the market is going to grow.
Mark Stiving is a respected price strategist with more than 15 years of experience helping companies implement value-based pricing strategies to increase profits. A speaker, coach and consultant, Stiving has worked with many esteemed companies, including Cisco, Procter & Gamble, Grimes Aerospace and Rogers Corporation. His new book, “Impact Pricing: Your Blue-print for Driving Profits” (Entrepreneur Press, 2011), was written to further share his expertise. Read more from Stiving on his blog, www.PragmaticPricing.com. He can be reached at email@example.com.