SCORE Luncheon Remarks
11:45 A.M., Friday, February 12, 2010
Oak Hill Country Club
Pricing From the Outside In
Sarah B. Clapper
President, Clio Associates of Rochester. Inc.
Pricing from the Outside In
I’ve got this great new product – how do I decide what to charge for it?
What usually happens
A sad (but true) story
It started with a great idea
A few weeks ago I met with a new client who wanted a video script to promote a new home safety product he had designed.
He demoed the product and explained how it worked and it was a really slick product.
It so happens that my husband and I recently bought a piece of property in the Finger Lakes and we’re starting to plan our retirement home. I decided I want this product in the new house, so I asked how much it is.
He said, “It was $395, but I talked with a couple of home builders about offering it to their clients. They wanted to make some money on it. I couldn’t discount it without losing money, so I had to increase the price to $695.”
But he didn’t do his homework
The first problem: he didn’t think about how he was going to sell the product before he set the price.
But the second problem is even worse,,,
So the price was inside out
If he had said the price was $1000 – I would have bought it.
If he had said the price was $2000 – I would have bought it.
If he had said the price was $3000 – I would have hesitated, I would have gone home and thought about it. But if I’m going to spend $150 - $200K on a new home, another $3000 to keep it from burning down is a no-brainer.
And he gave money away
I don’t know what the correct price is for that product – but I’m pretty sure $695 is too low. The guy left money on the table.
Inside-Out Pricing Cost + “Reasonable” Profit = Selling Price
That’s very common – especially for new businesses.
They figure: it costs me $100 to make the product.
If I make $15 on every one sell, I’ll make a pretty good living.
So I’ll sell the product for $115.
What’s wrong with that?
- People don’t buy on price. They buy on value.
- Value is a marketing concept -- not a cost accounting concept.
- Set your price based strictly on your costs and you’ll probably leave money on the table.
- Warren Buffet: Price is what you pay. Value is what you get.
- Sometimes you’ll end up with too high a price – but in most cases, you’ll under price your product.
- If you set your price too high, the market will tell you and you can adjust.
- If you under price your product, nobody’s going to say, “You really ought to charge more for this.”
Pricing from the Outside In
Determining the value of your product or service
So how do you avoid Inside-Out Pricing? By pricing from the Outside In. And it starts with determining the value of your product or service.
Know thyself
- Honestly assess your product/service
- Benefits
- Weaknesses
- You must be brutally honest about what your product does well… and what it doesn’t do.
Know thy market
- Who needs it?
- Who will want it?
- How will your product/service meet their needs and wants?
- Define the key benefits
- How will they buy it?
- Define your sales/distribution channel(s)
- Needs and wants are different. If I need a car, I can buy a Hyundai for $15,000. But if I WANT a BMW, I’m prepared to spend a lot more.
You’ve already done an assessment of your product’s features and benefits. Now is the time to determine which benefits will be the most important – or the most valuable -- to your customer.
- Define your sales/distribution channel. If you’re going to sell through distributors, they’ll want to make some money on the product. If you’re going to sell through retailers, they’ll want to make some money. If you’re going to sell to distributors who sell to retailers, they’ll both want to make some money. You have to build those profit margins into your pricing.
Know thy competition
- What options are available to your target customer(s)?
- How does your product/service compare?
- This is another time for brutal honesty. If your new product is truly light years ahead of the competition, you can command a high price for it. But frankly, that doesn’t happen all that often. Most new products are pretty much “me toos” with a unique feature or two.
Pull it all together
- Product positioning
- Market leader
- One of several roughly comparable options (a “me too”)
- A “no-frills” alternative
- Marketing objectives
- Quick market penetration?
- Slow and steady growth?
- By now, you’ve got a lot of information about the marketplace and the value your competitors offer.
- So you need to finalize your product positioning.
- And you need to finalize your marketing objectives. When you’re launching a new business or a new product, market penetration is usually your primary objective.
Ready… set… price
- The price must be consistent:
- with the product value
- with the product positioning
- with your marketing objectives
Balancing price and value
I said up front that people buy on value, not on price. In other words, if the product has a low value, they don’t expect to pay a lot for it. If the product has a high value, buyers expect a high price tag.
Price-Value Imbalance
If you set a high price on a low-value product, people think you’re trying to gouge them.
But the reverse type of imbalance is just as bad. If the product has a high value, but a very low price, people wonder what’s wrong with it. If a Hyundai dealer says he can put me into a brand new car for $15K, that makes sense. If a BMW dealer tells me that, I’m thinking, “What’s wrong with this car?”
Depending on your marketing objectives, there are times when you can tip the price-value balance a bit…
When it’s OK to tip the scales
If you’re introducing essentially a “me too” product and you want to take market share quickly, pricing a little below the competition can be a very effective way to do that.
Last, but not least…
- Talk to your finance expert
- Talk to your attorney, if necessary
Before you publish your price list, you want to make sure you’re not going to lose your shirt or get yourself in trouble. So let the accountant run the numbers and confirm that your pricing works.
And if you’re in an industry that’s price-regulated, of course, talk to your attorney.
So why do good products get bad prices?
- Not doing your homework
- Letting the wrong people set prices
- Lack of self-confidence
Your most important sale is to sell yourself to yourself!
- A lot of start-up businesses put the pricing function in the accounting department. Accountants are essential to any business, and they play a crucial role in pricing – but it shouldn’t be setting the prices. That’s inside-out pricing. The accountant’s role is to bless the prices you’ve determined from the outside in.
When the Going Gets Tough
Overcoming the irresistible urge to discount
Once you’ve set your prices, you may think you’re done with pricing. Actually, you’re just entering the most dangerous phase.
What drives us to discount
- Fear
- Slamming doors
- Salespeople don’t know how to sell value
- Salespeople don’t know how to sell…period
A number of years ago I had a client – a small business that was introducing its first product. And I developed the marketing materials and did sales training for them. And they went to a trade show and gathered lots of names. And about a month later, they called me in a panic and said they’d only sold a few products and they wanted to cut the price. When the phone doesn’t ring, we panic and assume the price is too high.
Slamming doors – a bunch of potential customers say “No” and we panic and think the price is too high.
Salespeople who don’t know how to sell: This is particularly a problem for start-ups, where the guy who designed the product may be the one who’s out selling it. And he doesn’t understand that “No” doesn’t necessarily mean “Never.” It may mean, “Not today,” or “You haven’t convinced me yet.”
When the going gets tough
- Cutting price should be your LAST option
- If cutting price is the only option:
- Take out some of the value (keep the price and the value in balance)
- Tie the lower price to a long-term commitment
- If you cut it, be prepared to live with it
There are lots of reasons why people don’t buy your new product. Usually it’s because they’ve never heard of your new product. In other words, it’s a marketing problem, not a pricing problem.
Cutting price should be your last option. And if you cut your price, be prepared to live with it because it will be VERY difficult to raise the price.
Another sad (but true) story
My first job was with a local company that manufactured ophthalmic products – eyeglass frames and lenses. They used to compete with Bausch & Lomb. And the lens business was being beaten up by cheap foreign manufacturers. And toward the end of every month, senior management realized that we weren’t going to make our sales goal for lenses that month.
So at the end of every month, I’d get on the phone with all of our distributors and say, “I’m offering a 25% discount. How many pairs do you want?” And I’d write lens orders.
And an amazing thing happened. Sales for the first 3 weeks of every month declined more and more. And during the last week of the month, I’d write bigger and bigger lens orders at 25% off.
And the company lost more and more money.
That company is no longer in business.
You can’t discount your way to profitability
Pricing from the outside in
1. Do your homework.
2. Set your price from the outside in.
3. Believe in yourself.
4. Believe in your product/service.
5. Command the price you deserve.