The Pricing Conundrum

Achieving Success with the Right Strategy

There are many factors that pose a challenge for new products and new market entrants. Pricing is one of them.

24th July 2022                            

Patrycja Maksymowicz

When it comes to pricing, it is a dark art, especially in the early stages.

In the absence of any experience in trading or knowledge of the market, how can you determine the right price for your product or service? No matter if you are a startup launching your first product or an international newcomer. You may find things confusing.

The process of convincing your clients to try and purchase your product is not easy.

Pricing your product correctly can be a challenge. You want it to be high enough to cover the costs, but low enough to attract customers. What is the best approach? 

One thing is certain, pricing can be a difficult business and many get things completely wrong.

This pricing guide will help you determine how to approach it and what to charge clients for your product or service.

It's important to think about the startup cost, the amount of time and resources you're going to put in, and what kind of customer base you're going to go after in order to have a successful product or service.

A free give-away

A high-end furniture designer from the EU approached us a few years ago seeking market strategy advice and explaining that for the purpose of breaking into the UK market, they decided to provide elaborated project designs to all interested parties. At no charge. Nevertheless, they hoped that everyone would use them to fit their furniture later. Their T&Cs were very basic.

Through word of mouth, they received a large volume of inquiries.  In addition to assigning one of their designer teams exclusively to these projects, they also sent people to the UK every time they got a new enquiry.

Overall, customers were satisfied with their designs, and most chose to use local contractors to fit the furniture since the T&Cs did not restrict them.

Let’s look at two useful and known strategies for new product pricing market-skimming pricing and market-penetration pricing used by Apple and Android respectively.

Market skimming starts with a high price for a new product to skim revenues layer by layer by those who are willing to pay the high price at the beginning. The price is then lowered to skim maximum profit for each segment. This works well for Apple users who are more than happy to pay the initially higher price to get their hands on the latest iPhone.

Penetration pricing, on the contrary, starts with a low price with the aim to penetrate the market quickly so there is a large number of buyers but profitability is lower. The high sales volume often leads to falling costs and that allows for offering the product at a lower price. 

This strategy works well provided it’s introduced in a price-sensitive market, production and distribution costs decrease with the volume increase. It works best when competition is kept out of the market, too. 

Following industry rules while marketing your new product is not going to take you too far either. If you keep making products or services just like your competitors at a price that your customers will pay, fair enough. But the key is to find a competitive edge so you can make more profit.

Understanding the sources of competitive advantage could be a step in the right direction. Differentiating. It will help you make the right decisions and plan and run effective campaigns.

So look at what you're offering in the marketplace. Do you have competitive advantages? Are they long-term?

An established brand wants to launch an organic face cream. They conduct a successful survey of potential customers and understand that many women like to shop locally. Their friends and family support the brand, and since they will be purchasing the products in local stores they feel have a certain amount of trust in the cosmetic store owner.

Since they are well-liked they do not slash the price of their Organic Face Cream at the initial launch.

Do not sell yourself short. Price competition is dangerous, and it'll work against you.

The price you pay to become an all-time cheap supplier is close to zero margins. It is more appealing (but rather difficult) to compete while creating new markets as when your product is so different or innovative it becomes a new category. 

There is a significant shift to value-based pricing and how companies present their products or services to purchasers. Indicators like market demand no longer only influence long-term success, but rather profitability, quality of delivery, good customer service and communications take the lead. 

In 2016, we performed a health check on one particular tech company.

We reviewed and analysed their UK sales in relation to their overall performance in their domestic market, their competitors as well as the real value of the opportunities they had.

An in-depth review of their UK activity before engaging with us revealed, that they undersold their services on average two or three times relative to their British rivals while offering an equally good service.

Most importantly though, they'd never looked at their prospect from the perspective of the value their solutions would bring and the huge pains they’d sort. 

If your bespoke solution helps your client save £2M in a month, you should definitely take it into account when putting a price tag on your service or product.

Pricing strategies usually change as a product moves through its lifecycle. Adapting your pricing should be done based on regular market research and analysis. Both the market and you change over time. With the development of your team, your experience grows, your resources grow, and your costs may rise, but most importantly, the value that you're giving to your clients increases every day.

Curious to know more about how to approach pricing?

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