Pricing Your Product
Market Research
August / September 2006
Volume 4 Number 4
Pricing is one of the most difficult tasks for entrepreneurs to figure out. There are generally no pricing formulas or guidelines for most high technology products geared to industrial or government markets. Thus, careful research must be done to determine pricing for your product.
The first part of the research is determining exactly who your competition is, and what products they offer. Be sure to consider alternative products, or those that provide other ways of addressing the problem that your product solves. What features are available for each product, and how important are those features to customers? You might want to start making a matrix of your competitors' products and features as a reference tool.
The next part of the research is determining what your competitors charge for similar or alternative products, including any extra charges for features, maintenance, or other add-ons. Industrial product pricing is rarely publicly available, so be prepared to do some sleuthing. You can get the information by talking with potential customers, attending trade shows, or talking with others in the industry. If the company is public, you may be able to piece together or extrapolate some information by looking at its 10-K report, available at www.sec.gov. Add the pricing that you find to the matrix.
As you do your research into market pricing, you should also make notes of when products were introduced (easy to find from company press releases), and what happened to other industry product introductions and pricing after new products (or features) were introduced. Again, be prepared to do some sleuthing; the information is not easy to come by, but it is important.
With an idea of industry pricing in hand, you need to add your product to the matrix that you've already started. Where does your product realistically fit in? Are the solutions really solving known industry problems that are not addressed by current products? Are some features better than others, while some are about the same? Forget about how fabulous your technology is, and realistically focus on the resulting benefits to potential customers.
The next to last piece of information that you need before you formulate pricing scenarios is the cost to produce your product. You should include your sunk costs, such as R&D; manufacturing costs; general and administrative costs; and marketing costs, among others. If you are in the process of writing a business plan to get funding, you may not know all of these costs. However, you need to do enough research to come up with some estimates so that your financial information is credible. If you are gearing up for product production, you should have most of these costs already.
The final piece of research you need is an understanding of how your potential customers view purchases and pricing in your industry. Purchasers in industrial settings buy products to solve problems, first and foremost. Beyond that, it is likely that they look at the return on investment for the product. Does it help reduce other costs, such as manufacturing defects, human resources, or time to manufacture products? Does it add costs, such as maintenance, additional needed equipment, and operating expenses? Talking with people in your industry is the best way to determine how customers look at the return on their investment.
If your product really solves more known problems and provides more benefits than what is currently in the market, you should strongly consider pricing your product higher than your competitors. Why? Customers should be willing to pay higher prices for better value. In fact, there is often a customer perception that a higher priced product is better than lower priced ones. If you are known in the industry, that can help support a higher price as well. Your product price should cover your costs as well as include a healthy mark-up. Your competitors are probably working on product upgrades and will introduce them shortly, or they will discount their products to maintain their sales numbers.
Your research should give you an idea of what to expect. If they cut prices or add features in response to new competitor product introductions, you may be forced to change your pricing to get sales. If you've started out with higher pricing and high margins, you can do this without sacrificing all profitability.
Just remember that if your product is really better in the eyes of customers, you can still be the high price leader, even if you must adjust prices.
If your product is on the whole on par with your competitors' products, or you do not have any traction in the industry, you should consider pricing your product about the same also. You will not have as much leeway without a strong product differentiator. The key here is to be sure to cover your costs, because it is very likely that your competitors will again adjust pricing or features.
If you have covered your costs and included a moderate mark-up, you should be able to maintain some profitability.
If your product does not meet customer needs as well as your competitors' products, you have no real choice but to price lower unless you are well known in the industry. Make sure you cover your costs and provide for a small profit margin, so that future adjustments won't force you into the red. If your product really isn't better in any way, you should ask yourself if you should launch it now, make product adjustments to enhance it, or move on to something else.
The key to pricing is to do your research, keep abreast of what your competitors are doing, and be flexible. You will likely have to make changes in the pricing or your product as the industry responds to your product. The more educated and prepared you are, the better your odds of surviving the changes.
Betsy Gillette is director of market research and planning at Technology Ventures Corporation.
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