Setting price points

Pricing is the least precise thing that we do. There is in economic theory a curve of net profit vs selling price, an inverted parabola, and we have no clue where the peak might be. We guess.

What data do you have for analysis?

Plus it isn't that linear or symmetric--people use price as an estimator for quality, so if you drop the price below some poorly-defined threshold, unit sales will go _down_.

One mistake I've see people make is to set their prices too low, based on BOM cost times some constant multiplier, and thus destroy the market when they could have made a metric buttload of money by just undercutting the existing players by 20% or so.

Cheers

Phil Hobbs

And, things become even more complicated when you combine these two factors, with the effect of pricing feedback between competitors.

I suspect that, at best, the resulting play of price-and-demand looks like a highly rippled sheet, with multiple profit-maxima and profit-minima for various parties scattered across a warped plane.

At worst (and I think this likely) it's chaotic, and not solvable in a closed form.

I have no idea what data *they* compiled to justify their analysis. Nor do I think any of us would be qualified to evaluate that data as to it's accuracy.

My question has to do with identifying *issues* that we could raise to see *if* the analysis might be lacking, in some way.

E.g., a new product comes at some cost to your existing product line. It may compete with other products that you already offer. In which case, any sale that COSTS you some other sale has to be burdened by this fact. If the analysis did not address this, then I would throw shade on it.

Likewise, you have to divert (or add) resources to the development, marketing and support of yet another product. This can also directly (and indirectly) burden existing products. Failure to factor this into the analysis would similarly cause me to mistrust the analysis.

As we can't (likely) critique the data in the analysis, I'm hoping we can find fault (or not!) in the approach they have taken and use that to suggest lower (or higher) confidence in their results.

Yup. "It must be cheap (crappy) to sell for such a low price"

The goal of *pricing* should always be to determine what the market WILL pay for the product (which is a continuous function).

My other half has an occasional drink at bedtime. I watch the price vary almost weekly at the store where I typically purchase it. You KNOW their cost isn't changing weekly. So, they are trying to "feel" what folks are willing to pay for it. When the price drops to my sweet spot, I'll buy half a dozen bottles.

I see the same sort of price variation in many other items. I use a lot of balsamic vinegar. I never pay the retail price so MY portion of their sales is nonexistent -- until it goes on sale at a particular price point. At which time, I buy a few gallons. So, anyone watching the sales figures sees lots of traffic at that price and relatively less at the "other". When they try to entice me at some intermediate price, I simply don't bite -- eventually the price I *want* returns.

You don't have to "solve" it. What you want to do is come up with a reasonable estimate of the amount of volume you can push at a particular price point. Then, decide if that is profitable, for you.

I recall seeing a televised interview with a guy (?) selling cupcakes for $4. (if you've ever baked cupcakes, you realize $4 is outrageously inflated price). The video showed a block-long line of folks (NYC?) waiting to purchase one.

The interviewer asked why he didn't raise his price to $5! The guy pointed to that line and said, "At $5, the line would likely be shorter. The LONG line is an effective marketing tool!"

There seem to be special price points for "personal indulgences". $5 seems to be one as folks will pay that for a cup of coffee, cupcake, etc.

There similarly seems to be a price point for charitable donations as you see an increasing number of folks looking for "just $19 per month". It's hard to believe the needs of these different groups all hinge on $19/monthly. Rather, it seems that someone has determined that they have a decent chance of coaxing "< $20" monthly from people than they would $20 or more!

As with other pricing strategies, they are trying to figure out what the market will pay for their product (even if their product is "feel goodism").

Obviously, most product and services are priced that way, or there wouldn't be so many nines in them.

Jeroen Belleman

There are only two points that matter.

How much does the competition charge? And how good is the competitive produ ct?

If you part is decidedly better, you can charge more. If you can produce lo ts of product - enough to saturate the market - you can charge less and ho pe to grab most of the market.

If charging less will buy you more customers, it may make sense to charge q uite a bit less. The usual rule of thumb is that making ten times the volum e lets you halve your minimum price, but that only tends to be interesting if you've got a mass market product.

If you've got a unique product it's a different game, and you charge as muc h as the market will bear - dropping the price as soon as you can make more than you can sell, or when some competition shows up.

A good many years ago I helped a guy whose business was fishing rods. Fly rods used less material but were the highest priced rods. He tried to pric e his rods about 20 % below his competitors. But they did not sell at tha t price. So he changed the price to about 5% more than the highest priced competitor, Sage. Sales picked up.

Dan

rods used less material but were the highest priced rods. He tried to pric e his rods about 20 % below his competitors. But they did not sell at that price. So he changed the price to about 5% more than the highest priced com petitor, Sage. Sales picked up.

when men(and women) buy toys to show off to their friends they don't want t o be the one with the cheap stuff ;)

tor

et

ly rods used less material but were the highest priced rods. He tried to pr ice his rods about 20 % below his competitors. But they did not sell at tha t price. So he changed the price to about 5% more than the highest priced c ompetitor, Sage. Sales picked up.

to be the one with

If the toy is bought purely to show off, this matters. Since smart phones a ll seem to do much the same job, and Apples products cost about half again more than the less showy competitors, they should have become a monopoly. W hat you are showing off may not be just your capacity to pay through the no se - owning a Samsung smart phone might be seen as a claim that you can see through marketing hype. I use a Samsung Galaxy A20. I didn't want to spend even that much money since my old phone - a Galaxy S5 - did pretty much ev erything I wanted except exchanging secure identity information with the Au stralian Tax Office, who had decided that anybody owning anything that had an operating system below Android 7 wasn't worth talking to.

Obviously one of those guys had already done it. ;)

Cheers

Phil Hobbs (Who doesn't understand pricing either)

It is important to know what comparable or competitors products sell for to as not to obviously under or over price. And also what the market will stand - I amazed at some of the audiophool prices for instance.

The company I used to work for had a strict rule that they would not put anything into production where the raw bill of material cost was more than 20% of the intended selling price. This produced some very silly "optimisations" to hit the target build cost. Swapping the right grade of stainless bolts for cheaper inferior ones that would corrode on a timescale of 5 years in kit intended to have a 20 year lifespan.

I recall one case study from a course on this topic where there was a new entrant into the cleaning materials business and they didn't do their homework at all and undercut their competitors by a factor of three based on a naive cost plus margin pricing scheme. They got plenty of big orders but went out of business inside a year because their competitors took it in turns to buy up one critical ingredient each.

A variant of that scheme was used by Chance and Pilkington to maintain their near duopoly premium price on window glass in the Victorian era. Without all the right ingredients you can't make the product!

Our business had the same rule of thumb. It is a remarkably good rule of thumb. The only thing is that expensive components should get a lesser weight than 5:1. That would help not do stupid things like putting in inferior bolts.

We have a new product, and our first customer told us what a great deal it was for the price. That was the old price of course.

tor

et

ly rods used less material but were the highest priced rods. He tried to pr ice his rods about 20 % below his competitors. But they did not sell at tha t price. So he changed the price to about 5% more than the highest priced c ompetitor, Sage. Sales picked up.

to be the one with

I do not think that is the reason. I think it is because the cost of a fis hing rod is small compared to the cost of a fishing vacation.

;Dan

Actually, your more likely to be ridiculed for buying expensive kit and thinking that will make up for your lack of SKILL!

It's more likely that consumers have no realistic way of determining the (monetary) "value" of an item without comparing it to some OTHER item's stated value. (of course, THAT item's value was only determined by a consensus of consumers opting to pay it's asking price -- "Turtles all the way down!")

Look at most of the items that you encounter in a given day and ask yourself to put a price tag on them. Then, try to recall what you actually PAID for them!

Sometimes, I carry a PMP when I take my daily walks. As the device that I use is pretty small, it's easy to clip to my lapel or even wrap my fist around. So, *wired* earphones are no big deal.

I recently opted to move my music archive onto a rescued Droid MAXX 2 as it has a considerably nicer user interface (to select the pieces I want to hear) and larger capacity (so I can put more of my collection on the device instead of having to pick smaller subsets of it)

The MAXX2, however, is MUCH larger than the tiny PMP that I was using. It's not possible to clip to my lapel and tedious to hold in my hand. Slipping it into a pocket means I'm always wary of getting entangled in the cord.

Solution: wireless earbuds!

Wait. You want HOW MUCH for the convenience of cutting the cord??? Really??? And people are willing to PAY that much?? Sorry, Charlie. I'll find a compromise solution that will allow me to spend that hour a day comfortably without parting with all that cash...

Gliding aphorism: there is no substitute for (wing) span Retort: there is, but you can /buy/ span.

Tangentially related question, what are the conflicts of interest if any if you do a one-off job for a client and get to thinking there might be a market for the box if changed up a bit and sold as a stand-alone product in the general market? No NDA was signed with the client and no exclusive transfer of IP or manufacturing rights etc. was signed off on or implied.

Like as an example the client needs a custom lighting controller for their own personal/business use and you design and build it to the spec for them and then realize there might be a market to other businesses for the same design.