Pricing FAQs

Question:Why do we see 9's used at the end of so many prices - like $.99 rather than $1.00?

The idea behind this practice is known as the "Just Noticeable Difference" or JND. This is based on research that shows that customers see a big difference between two prices, even when in reality there is only a penny difference.

Question:I have a new product, but I don't know how to price it. Where do I start?

Methods for pricing a model are numerous. One model, called the EVC, prices goods from the customer's perspective. For more on that, visit this tutorial. But before pricing a product, you should consider five basic questions. The follow below. 1. Alternative Solutions: What alternatives do buyers have for solving their problem? Are they aware of these alternatives? Customers who are knowledgeable about competing products generally use the prices of these products as a comparison point. 2. Ease of Comparison: How difficult is it for buyers to compare the products of other suppliers? Can the benefits be easily observed, or must they be experienced first? Obviously, this is a reason why firms often let customers have a free trial. This lets the customer easily compare the products of different suppliers. Not allowing customers to try out a product whose benefits are not easily observed prior to trial makes pricing aggressively nearly impossible. 3. Unique Benefits: Does the product have any unique benefits that differentiate it from any competing products? Do customers feel these unique benefits are very important to them? 4. Monetary Significance: How significant are buyers' expenditures, both in absolute terms and in percentage terms? Say, for example, that you sell an add-on to a customer’s ISP expenditure, like some new plug-in to help customers more efficiently manage their downloads. If their ISP costs are $19.95/month and you sell your add-on for $5.00 a month, this is a relatively small dollar figure, but roughly a 25 percent increase to the customer! Expect customers to focus on the percentage, not the absolute. 5. Complementary Costs: To what extent must buyers make complementary expenditures in anticipation of its continued use? Are buyers locked into these expenditures?

Question:How do I calculate the price elasticity of my product in a marketing plan?

Price elasticity in marketing is calculated as the absolute value of the ratio of the percentage quantity change and the associated percentage price change. So, to calculate the price elasticity you need to figure out how much of a change (expressed in percentage terms) in what you sell results from a given change in price (also expressed in percentage terms). Often firms can calculate this ratio if they have a history of prices and quantities they've sold. You can also do this through experimentation by changing the price and noting the extent to which quantities increase or decrease. You might find this interesting after calculating the price elasticity of your brand/product. Academic research has shown that the average elasticity at the brand level is about 1.76 but could go as high as 2.5 (after correcting for various biases). In any event, you can see that price changes can have a significant effect on quantity sold.

Question:Do I have to price my product low to gain sales?

You're essentially asking a fundamental question in marketing. The short answer is that it depends. First, it depends on whether or not your customers are price sensitive. If they deeply care about a low price then you need to price low. But it is important to note that while some customers care deeply about low price, this is certainly not true of the broad market. This is because customers make tradeoffs. Tradeoffs mean that they'll tradeoff one benefit (like a low price) for some other benefit that they care about as well (say, convenience). For this reason, customers are typically willing to pay more if they get something they really care about in return. This is confusing for many people since they see that people like a good "deal" or something that is given away. But don't confuse the fact that people like a good deal (just about everyone likes that) and the more fundamental idea that people are willing to make tradeoffs.

Question:How do I determine a price for my product?

You ask people. OK, it’s a little more complicated than that. You have to ask the right question in the right way, and you have to know what to do with the answer. You start with an “S”-shaped curve, the demand curve. Demand for a good or service starts rising slowly. Then, if the product is worthy, you get a sharp ramp upward in sales. Finally, demand levels off at a high level, and you start to get a replacement market. It’s important to understand where your price should be to maximize profit: -When you’re starting out, you want to price as high as possible. -In the heart of the market, you want to be competitive. -When you get to the replacement market, you need to offer a bargain to keep up your market share. Once you know where your product sits on the demand curve, you’re ready to start the exercise of setting the actual price. For information on exactly how to do this, please see How to Set a Price

Source: marketingprofs.com

 

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