OnDemand WTP Pricing Research

Pricer’s Points: The 6 things you need to know to price your product/service | Marcelo Ambrosio de Góes

Pricing is one of the most relevant components related to the well-functioning of your business. You might remember McCarthy’s 4P’s from marketing: price, promotion, place and product. A good business does the four well, but pricing is easily the most flexible marketing component where you want to spend some time to boost sales and maximize profit.

Determining price may sound like a daunting task, but it can be done provided you understand 6 underlying components:

1) economics, 2) how the operation works, 3) financial modeling, 4) company strategy, 5) competition and 6) the client. Each component is explained in a logical stream which you may want to follow when creating your own pricing.

Economics

Many times we do not like to accept it, but the amount of sales we make boils down to supply and demand. Getting the price right is more important than telling your client that your product is a labor of love (which everyone already does, by the way!). The way demand works is very simple: the higher your price, the less clients will want your product. Assuming your goal is to maximize profit, you need to do some math. Profit is the difference between revenue and cost (both fixed and variable). Revenue is equal to price times quantity. Quantity increases when you lower your price, but the foundations of your cost do not change. Therefore, you are looking for the point where the balance between price and quantity is just perfect to make the most out of your effort. What an economist might tell you is that this balance will come when your marginal revenue equals your marginal cost. Applying this to the business world, you need to know the lowest margin and financial indicators you are willing to work with – if you want to maximize profits, eventually you will need to drop down to your minimum acceptable, even if this is not how you position yourself in the market initially.

How the operation works

Perhaps this is the most important point out of the six. When you are pricing something, you need to understand your operation in detail. This means understanding your fixed and variable costs, your operational capacity and the need to make additional investments. Each case will be different, so either you become an expert on the business or you need to rely on somebody who is. Typically what you need to have an in-depth knowledge of is:

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The 6 things you need to know to price your product/service | LinkedIn.

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