Pricing your new product or service

Pricing a new product is a thorny issue for a new business. You should, of course, look at your market and review your competition along with your costs and your hoped-for profits then, with a bit of luck, reach an informed decision on a sensible price.

By Martin Brassell, Enterprise Hub Network

But where do you start when you have to price an innovative new product or service that has few, if any, direct competitors? The biggest mistake new businesses can make is falling into the trap of thinking that there is no competition. There is always an alternative for your potential customers, even if that alternative is doing nothing. Usually they have several.

So here are some pointers to assist you when you are battling with your pricing dilemmas:

•    Pricing comparatively with other products the customer might be considering can give them perspective and highlight the benefits 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.
    
•    Are you better off selling fewer products at a higher profit margin or more at a lower one? If your product is unique and well protected, you may be able to hold out for a high price and high margin and accept that sales may take longer.

•    If 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.

•    Consider how you want your brand to be perceived. 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. 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.

•    Selling to new customers is generally reckoned to cost at least five times as much as selling to existing ones. It is usually worth accepting initial reductions in profit in order to secure long term clients.

•    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.

•    Be sure to tread carefully with “introductory discounts”. They often cause businesses problems when trying to re-set price expectations at the end of the 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).

•    Consider whether you can deconstruct the product into components. You may be able to expand your customer base by selling your basic product or service, at a lower price, then 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.

•    If seeking to justify pricing on the grounds of efficiency or cost savings, be certain that your customer is really in a position to take advantage of the benefits 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!

Martin Brassell is a 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.

www.enterprisehubnetwork.co.uk

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By Martin Brassell  on   Jul 13,2008

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Keywords

pricing    product launch    margins    cashflow    sales   

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