Pricing Demystified, Part I

Determining the right price to charge for your product or service is mind-boggling at best and risky at worst. Price too high and your brand is perceived as too expensive; price too low and your product loses money, gets perceived as low quality, or both.

Many businesses first assess what it costs to produce their products and then add on some margin for profit. This is known as cost-driven pricing.  Though this practice is common, it can be dangerous, since a competitor with a lower cost structure will be able to undercut them on price.

It is better for businesses to practice  price-driven costing instead.  In this case, the business first determines the optimal price to charge its customers, and then works to optimize the costs to produce the product in such a way that it can make a satisfactory profit at that price point.

Knowing what you can charge for your product forces you to think strategically about how to make the highest quality product for the least cost possible.  This way, your business has some margin to withstand any price competition that may arise.

How is the optimal price point for a product determined?  There are several pricing research methods available: conjoint analysis and discrete choice modeling are common, but also complicated and expensive.  Gabor Granger and Van Westendorp are also popular, but simpler and more intuitive.

In “Pricing Demysitified, Part II”, I will discuss how to use the Van Westendorp Price Sensitivity Meter to determine the optimal price for a product or service.

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