“Price is what you pay. Value is what you get.”

– Warren Buffett-

Where to start from:

When a new entrepreneur establishes his company, the first obstacle they might face can be the pricing. You can nail it or it might be the beginning of the end for your business. First, we come up with an idea of the business or the product. We start to get excited about the idea and we are already confident that this will be the next top seller. We are confident about the business idea and maybe we already have an idea how profitable the business will be. We start to think how much money we will need to start the business. What are the starting fees, do we need to buy equipment, machines, are we going to rent a space where to perform the business?  In the beginning most of the new entrepreneurs are living this so-called rose-colored phase where everything still seems like your product will be the next Tesla. We are excited, full of energy and confident. Next, we stop and start to think about the pricing, budgeting and risk analysis. Especially in the beginning it might be thoughtful to get someone else to go these over with you. It is recommendable to have opinion from someone who is not so excited about the business idea. Just to be realistic. I have priced products and services in my life several times, but never really understood the logic of pricing before reading about it. I would say people do not pay enough importance for pricing in the first place. In this essay I will open up the different methods of pricing, but to be honest you could write a book about this important topic.

“The moment you make a mistake in pricing, you’re eating into your reputation or your profits.”

– Katharine Paine –

Symson ( Website )

There are several different pricing methods, but let me go trough few of them with you:

Cost based method : Like the name infers this method is based on the costs to produce the product or service. This method is not based on the added value for the customer. Method might easily cause overpricing in weak market areas and underpricing in the strong market areas. This is not ideal situation, and it might leave your business without any customers. It is not so black and white to price the product based on the costs. Especially in the beginning of your journey your costs might be very high, and this does not walk hand in hand with the value the customer will get when buying your product. Method is to count all the costs that you have when producing the product or service and figuring out sales margin we want from the product. The issue might be that the customer does not value the fact how much the costs are for the manufacturer. The costs vary based on the volume that you are producing. Normally the more you produce the more the costs are, but on the other hand the more you produce some of the costs might go down.

Competition based method:

Following the trend of other prices in the same field. Based on the inquiry made by HIMA this was the most used method when it comes to pricing. 55% of the companies who filled the inquiry used this system to price their products. Pricing is signifying the price that consumer is ready to pay for the product based on competition. In this technique you are not stepping out from the competition by pulling higher or lower prices, but your pricing is neutral. I have used this method recently as well. Last year I used this method to price our saunaboats in Tampere. 2021 I decided to price them very low in order to take on the market lead and to get our products familiar for the audience. There are several saunaboats in Tampere, but they are a bit older and not equipped with similar quality as ours, but we wanted to stand out from competition. So during last year we priced our products to be on the similar lever with the competition. We had successful summer and loyal customer base, so for this year we priced the products again. We lifted our prices 25% from last year. We have received more bookings than last year, so assumption is that the pricing was done correctly. Customers agree that our pricing is correct. Our forecast is to receive similar amount of bookings than last year or maybe even more due to added marketing and recognizability among the audience.

Reference pricing / Skin pricing / Skimming :

Product or service is new and customers are not familiar with the concept. Referencing strategy, we price the product very low lets say for the first 100 customers. By this strategy we will win over credibility and gain recognition. This can be used in the very beginning of the product journey. The goal is to gain high sales margin and cover the manufacturing costs. These prices might be higher than the consumer would normally be eager to pay. This strategy works when the profit is better when selling to a smaller audience with higher prices rather than selling to large audience with lower prices. You might use this system if the companies funds are not reliable and company needs money fast. The pricing will go down when there will come competition and similar products are launched.

Loss leader strategy :

Loss leader strategy is based on the future benefits. We settle to sell the product in the beginning with loss or with breaking even due to the fact that it will pay off in the future. This is a great strategy when launching for new market area and gaining customers trust. Be careful that the cashflow does not suffer too much when using this technique.

Quality management pricing  / Premium pricing :

This is the pricing you can use if your product steps out from the market. You still aim to reach all the consumers out there. Like in our case regarding the sauna boats. Our product is unique, it offers more value for the customer and consumers are ready to pay more for this service. We are consciously aiming for consumers who appreciate the added value and are willing to use more money for the experience compared to the competition. Our aim is to be the market leader with higher prices but adding more value for the customer experience at the same time. Higher quality of service is justification for the higher prices. Higher pricing might cause issues weather the customer base is large enough, but if the sales meet your requirements is nothing wrong with being the market leader. A good example can be Adidas. They are selling premium quality with premium prices. Not everyone can afford to buy their products but the customer base is so loyal, it’s enough for them to be one of the worlds most respected brands. Higher prices makes customers feel that the products are high quality. Customers normally feel very distinguished to be connected to these high premium brands.

“Pricing is actually pretty simple…Customers will not pay literally a penny more than the true value of the product.”

– Ron Johnson –

Conclusion:

Spend time when deciding your prices for the product. This might be the fact why your product will sell like rocket or it might leave you empty handed. I have understood whilst reading more about the different pricing systems how big difference does it make. How differently the consumer sees the prices than the manufacturer or the one selling the products. There are many companies that are stepping out immediately when thinking about prices. Let’s say example Starbucks , in my opinion the products are too expensive and for me I do not see the extra added value for the customer. They are pulling the prices up, maximizing their profits, by using value-based pricing. They are selling the idea of higher value and based on that asking much higher price than their competitors. They manage to do it in a civilized way that the consumers are willing to pay the price increase without driving the consumers away.

Pricing is hard and you should really use time to find the right price for your products. Maybe even ask someone professional to help you with this. You can also make polls or queries to people asking how much would they pay for this product/service.  I have found this subject very interesting so most likely during the next years I will be writing another essay based on this field.

Symson ( Website )

References:

Website. Written on 2005. Read on 14.4.2022. Link: http://www.kulmat.fi/images/tiedostot/Artikkelit/HinnoittelunABC-opas.pdf

Website. Symson. Read on 14.4.2022. Link: https://symson.com/the-8-biggest-pricing-challenges/?utm_term=pricing%20strategy&utm_campaign=ENG+-+Price+Intelligence+Software&utm_source=adwords&utm_medium=ppc&hsa_acc=6249112919&hsa_cam=16071806526&hsa_grp=132302595345&hsa_ad=579472646578&hsa_src=g&hsa_tgt=kwd-18307633&hsa_kw=pricing%20strategy&hsa_mt=p&hsa_net=adwords&hsa_ver=3&gclid=Cj0KCQjwjN-SBhCkARIsACsrBz5Bf0-8c1u1MfAwSo5skUR4uDSQ3XXIAD2HDqSo-WT–ty1T6-jHDsaAtSIEALw_wcB

Website. Written on 07.09.2021. Read on 14.4.2022. Link: https://www.priceintelligently.com/blog/bid/184451/how-starbucks-uses-pricing-strategy-for-profit-maximization