### **1. Define your end consumer profile before deciding the price** There are four types of end consumer profiles: 1. **Chinese goods market:**  - In this market, products have low prices and low quality. 2.    **Value for money market:**  - In this market, the price of a product is low but its quality is very high.  - The customers of this market need a good quality product at low prices.  - Relaxo shoes and Maruti Suzuki cars are examples of this market. 3.    **Opportunistic market:**  - These markets have high priced products with average quality.  - For example, in Cinema Halls, you get popcorn of good quality but at very high price. Similarly, outside Taj Mahal, you get products of average quality at high prices. - It is a market having monopoly. 4.    **Premium market:**  - It is a market wherein high quality products are sold at high prices. - For example, Mercedes Benz car has high quality and high price. So, you should define the end consumer profile first and then decide the price. Without understanding end consumer profile, you cannot decide the price of your product. ### **2. Cost of Goods Sold (COGS)**  **If you don’t know your costing, then you cannot decide your pricing.** Costing means the investment made to produce a product. It is essential to determine the costing in numbers. For this, you can work with a MIS person.  **For example:** A barber calculates his costing as follows: - **Cost of cloth:** Barber ties a cloth around the neck of his customers while cutting their hairs. $Barber bought the cloth = Rs. 100$ $Barber used the cloth = 1000 times$ $Cost of cloth per usage/per customer = 10 paisa$ - **Cost of Chair:** Barber makes his customer seated on a chair for cutting their hair. $Barber bought the chair = Rs. 5000$ $Barber used the chair = 10,000 times$ $Cost of chair per usage/per customer = 50 paisa$ - **Cost of scissor:**   $Barber bought the scissor = Rs. 100$ $Barber used the scissor = 1000 times$ $Cost of scissor per usage/per customer = 10 paisa$ In this manner, the barber determines his complete costing, including cost of cloth, blade, chair, scissor, employee salary, AC and infrastructure cost, cost of rent, etc. After calculating all the costs, Barber finds that: - Cost per customer = Rs. 35 - He charges = Rs. 100 per customer But, he does not have many customers. So, to attract more customers: - In the first three months, he can reduce the prices from Rs. 100 to Rs. 50. - Later, he can increase the prices because customer goes to only one barber, he don’t change his barber frequently even if he needs to give more price. Thus, once you learn how to calculate COGS, you can correct your pricing. ### **3. Quantification of value creation** - Costing is important for you; but you should not tell your costing to your customers or employees.  - You should do quantification of value creation which means how many rupees benefit you are giving to your customers. Based on this, you can decide your pricing.  **For example:** The CEO of a big technology company of America says: “_I have a simple rule, i.e., when I sell a product to customer, I keep the 20% of the benefit that the customer is getting on the product_.” This means that he gives 80% benefit to customer and keeps the 20% benefit. - The CEO didn’t say that he is selling an expensive product or a cheaper product.  - He only said that if my customer is getting the benefit of Rs. 1 lakh, then I keep only Rs. 20,000.  - It may be possible that his costing is only Rs. 3000 or Rs. 5000 but he gets Rs. 20,000 because he has positioned his pricing in terms of quantification of value. So, you need to check how much rupees value you are giving to the customer. You should calculate this value by determining: - How much rupees benefit you are giving to your customer? - In terms of money, how much productivity of your customer has increased? - How much rupees customer does your customer is getting? - How much rupees employee satisfaction does your customer has increased? - How much rupees branding your customer have improved? - How much rupees profitability your customer has increased? - How much rupees market share your customer has increased? When you give the calculation to the customer or when you quantify the value, then he will think that you are helping him to get more income and he will be easily ready to give you money.  **Why you should not tell your costing to your customer?** Customer can bargain with you and try to reduce your product price when he knows your costing. **For example:** If you tell the customer that the product costs you Rs. 100 and you are selling it for Rs. 110, then he will bargain with you and bind you to sell it for Rs. 102-105. **Why you should not tell your costing to your employees?** Do not tell your costing to your employee, especially sales employee because he will try to reduce your margin. **For example:** - The sales employee will say that the product costs you Rs. 100, so, you can sell it for Rs. 102 as of now and he will take out more money from this customer later on. - When you sell the product for Rs. 102, then next time the sales employee will ask you to sell it for Rs. 95 this time and he will take out more money from the customer next time. So, never tell your costing to the sales people. Decide your pricing, and make your mathematics and finance with your MIS team.  ### **4. Breakdown your decision-making unit** - Decision-making unit is the unit that takes the decision whether to buy your product or not. - Breakdown decision-making unit means identify who all are involved in the decision making unit. After this, you can decide your price.  - If you pick the top-down approach, starting from the top-authority, then you can influence the decisions of the decision-making unit. **Veto Power Person** In the top-down hierarchy, you should identify the person having the Veto Power. **_For example:_** - In the board of directors, the Chairman has the veto power.  - Even if all the directors rejected a proposal, Chairman has the Veto power to accept the proposal and all the directors have to agree with the Chairman. Give the proposal to the Chairman and then move down in the hierarchy slowly because if you move from bottom to top, then you need to give heavy discounts and you will get small order. Do not deal with the purchase manager; he is only for documentation purposes. If you find the Veto power person, then you will get more money.  **_For example:_** - Prestige cooker has used the slogan, “Jo biwi se kare pyaar, wo prestige se kaise kare inkaar” very cleverly as every wife will insist his husband to buy Prestige cooker if he loves her. - Thus, husbands are bind to buy this cooker. Similarly, identify the actual decision maker (or the Veto power person) and try to influence him. **Primary influencer and secondary influencer** - They are the advisor, the navratna of the person having the Veto power and can influence his decisions. - Identify the primary and secondary influencers of person with Veto power and build relationship with them to get high price. **Compliance officers** - These officers need to prepare budget, rules, and policies, conduct audits, and does other documentation. - You should keep these compliance officers along with you. **If you get a hold on this chain (decider– influencer – buyer – consumer) and make the Veto power person understand the story of the end user, then you will get the premium price.** **_Summary:_**  If you understand the fourth point completely, then you will be able to: - Reduce the sales cycle (which starts with the sending of proposal to the sales of product to the customer) from 90 days to 15-20 days - Reduces the cost of customer acquisition  ### **5. Identify the options available for your customers** _How many options your customers have in the market?_ _How many other people in the market are producing exactly the same value and working on the same proposition and same positioning as yours?_ - If you are able to reduce the number of options for your customer in the market, then you can charge a good price from your customer.   - If there is no one in the market, then you can charge any price from your customer.  - However, if your customers have more options in the market, then you cannot charge the price of your choice. You have to sell the product on the price at which your customer is ready to buy.  **6. Pricing based on the life-cycle of your product** Decide the price of your product based on the current life of your product.  **Early stage of product/ Brought product early in the market/first-mover:** - These products are bought by technology enthusiast and early adopter people who want to experience a new product, new technology, new experience, new design, or new colour. - These people buy less but ready to pay 3 times more than the market price. - So, if you can bring a product early to the market or you have first mover advantage, then your sales can be less but you can charge 2-3 times more than the market. **Brought product late in the market/ late majority/matured product:** - If you are selling product to late majority (means you have introduced the product late in the market and prices in the market are stable), then you cannot charge higher price. - To sell your product, you need to build schemes like EMI schemes, and combo schemes; invent marketing ideas; and provide good services.  - In this case, you should focus on the market share. **7. Drop the price at later stage** - If the price of your product is low in starting, it is very difficult to increase it later. - However, if you keep the price high in starting, then your existing customer will buy it. You can charge higher price from these customers. - Later, you can decrease your product price and attract the customers who want to buy your product someday when the prices are reduced. - So, you should keep the price high in starting and slowly decrease the prices later. **Key Learnings** - Define the end consumer profile - Calculate the costing of your product - Quantify the value of creating the product - Determine how much benefit you are providing to your customer and take out your benefit from it - Decide the price of your product based on its life-cycle - Reduce the number of options for your customer in the market - Keep the prices of your product high in starting and decrease them later