The Secret to Pricing Your Product Like a Pro
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The Secret to Pricing Your Product Like a Pro

When it comes to pricing your product, it is important to define your end consumer profile first. This means understanding the characteristics and needs of your target audience in order to determine the most appropriate pricing strategy. There are four main types of end consumer profiles to consider.

The first is the Chinese goods market, where products are typically cheap and low in quality. This market is often associated with products that are mass-produced and lack the features and durability of higher-end products.

The second is the value for money market, where customers are looking for high-quality products at affordable prices. This market is characterized by products that offer a good balance between price and quality. Examples of this market include brands like Relaxo shoes and Maruti Suzuki cars.

The third is the opportunistic market, which is often associated with high-priced products that offer average quality. This market is often driven by monopolies, where customers have limited options for purchasing a particular product or service. For example, you might find high-priced popcorn in a cinema hall, or overpriced souvenirs outside a popular tourist attraction.

The fourth and final market is the premium market, where high-quality products are sold at high prices. This market is often associated with luxury brands and products that offer superior features and performance. Examples of this market include high-end cars like Mercedes Benz and luxury watches like Rolex.

Ultimately, it is crucial to understand your end consumer profile before deciding on a pricing strategy. By taking the time to define your target audience and their needs, you can ensure that your pricing is both competitive and profitable.

Cost of Goods Sold (COGS) 

Calculating Cost of Goods Sold (COGS) is an essential aspect of running a business, as it helps to determine the investment made to produce a product. Once you know the costing, you can make informed pricing decisions. Costing involves calculating every cost incurred in producing a product, which includes the cost of raw materials, labor, rent, infrastructure, and any other expenses.

To determine the costing in numbers, you can work with a Management Information System (MIS) professional or use software that can help you calculate your COGS accurately. Let's take an example of a barber who has to calculate his costing.

The barber calculates his costing based on the following:

Cost of cloth: The barber uses a cloth around the neck of his customers while cutting their hair. He bought the cloth for $100 and used it around 1000 times. Therefore, the cost of cloth per usage per customer is 10 cents.

Cost of Chair: The barber makes his customer seated on a chair for cutting their hair. He bought the chair for $5000 and used it 10,000 times. Therefore, the cost of chair per usage per customer is 50 cents.

Cost of scissor: The barber bought the scissor for $100 and used it around 1000 times. Therefore, the cost of scissor per usage per customer is 10 cents.

After calculating all the costs, the barber determines his complete costing, which includes the cost of cloth, blade, chair, scissor, employee salary, AC and infrastructure cost, cost of rent, etc. The total cost per customer comes out to be $35, and he charges Rs. 100 per customer.

However, since the barber does not have many customers, he decides to reduce the prices to attract more customers. In the first three months, he reduces the prices from $100 to $50. Later, he can increase the prices because customers tend to stick to one barber, even if they have to pay more.

In decision, calculating COGS is crucial to determine the cost of producing a product and to make informed pricing decisions. Once you know the costing, you can adjust your pricing strategy to attract more customers and grow your business.

Quantification of value creation

Calculating the cost of production is an essential aspect of running a business, but it's important to remember that communicating this information to your employees or customers isn't always necessary or helpful. Instead, an effective way to determine pricing is through the quantification of value creation. This involves calculating the monetary benefit your customers receive from your products or services and using that information to determine your pricing strategy. 

For instance, the CEO of a large technology company in America has a simple rule for pricing his products. He keeps 20% of the benefit that a customer receives from his product and gives the remaining 80% to the customer. This means that he positions his pricing based on the quantification of value rather than simply selling an expensive or cheap product. His pricing strategy is based on the amount of monetary value he provides to his customers. 

To calculate the dollar value you're providing to your customers, you need to determine how much benefit they're receiving in terms of increased productivity, financial gains, employee satisfaction, improved branding, profitability, market share, and other factors. Once you have calculated this value, you can use it to set your pricing and communicate the benefits to your customers. By doing so, you're showing your customers that you're helping them increase their income, which can make them more willing to pay for your product or service.

In business, it is important to maintain a certain level of discretion when it comes to sharing the cost of production with your customers. This is because customers may use this information to try and negotiate a lower price from you. If a customer knows that a product costs you $100 to make and you are selling it for $110, they may try to bargain with you and pressure you into selling it for a lower price, say $102-105. This can lead to reduced profits and a less favorable outcome for your business. Therefore, it is generally advisable to keep your costing information confidential and only share it with trusted parties, such as your accountant or business partners.

It is generally not recommended to share the costing information with your employees, especially the sales team, as it can negatively impact your business's profitability. If you share the cost of a product with a sales employee, they may attempt to decrease the profit margin by suggesting a lower selling price to the customer.

For instance, let's say a sales employee knows that a product costs $100. They may advise you to sell it for $102 to the customer, promising to make up the difference on future sales. Once you agree to this, the next time they may suggest selling the same product for $95, which could further reduce your profit margin.

Therefore, it is wise to keep your costing information confidential and work with your management information system (MIS) team to determine pricing strategies that optimize your profitability without sharing sensitive financial information with your employees. By doing so, you can maintain a healthy balance between sales and profits and ensure the long-term sustainability of your business.

Breakdown your decision-making unit

When it comes to selling a product or service, it is important to understand the decision-making unit (DMU). This unit is responsible for making the final decision on whether or not to purchase your product. In order to effectively market your product, you need to break down the decision-making unit to understand who all are involved in the decision-making process. Once you have identified the individuals in the DMU, you can tailor your marketing strategies accordingly. 

To break down the DMU, you should start by identifying all of the individuals who play a role in the decision-making process. This may include people in various departments, such as purchasing, finance, and operations. Additionally, you should consider the level of authority each person holds in the decision-making process. 

One approach to breaking down the DMU is to use a top-down approach, starting with the highest authority figure. By targeting the key decision-makers at the top of the company, you can influence their decisions and increase your chances of making a sale. 

Understanding the decision-making unit is crucial for any business looking to sell its products or services. By breaking down the DMU and targeting the right individuals, you can improve your chances of success and increase your sales.

Veto Power Person

When navigating a top-down hierarchy, it is important to identify the person who holds the Veto Power. This is the individual who has the ultimate decision-making authority and the power to veto any decisions made by lower-ranking individuals. For instance, in a board of directors, the Chairman typically holds the Veto Power. This means that even if all the other directors reject a proposal, the Chairman has the authority to accept it, and the other directors must comply with their decision.

To successfully navigate a top-down hierarchy, it is recommended to first identify the person who holds the Veto Power and direct your proposal to them. In doing so, you can avoid moving from the bottom to the top, which often requires offering steep discounts and results in smaller orders. Additionally, it is important to note that the purchase manager typically only serves a documentation purpose and does not hold significant decision-making power.

If you can successfully identify and influence the actual decision-maker (i.e. the person with the Veto Power), you are likely to achieve greater success and potentially even increase profits. A clever example of this is the use of the slogan "Jo biwi se kare pyaar, wo prestige se kaise kare inkaar" by Prestige cooker. This marketing tactic targets wives, who are likely to insist their husbands purchase the Prestige cooker if they truly love them. By identifying and targeting the actual decision-maker (in this case, the husband), Prestige cooker is able to influence their purchasing decision and potentially increase profits.

Primary influencer and secondary influencer

The primary and secondary influencers are individuals who hold significant sway over the person with Veto power. They act as trusted advisors and are considered to be the backbone of the decision-making process. Their opinions and suggestions hold great importance and can greatly influence the final outcome. To secure a high price, it is essential to identify these key influencers and build a strong relationship with them. This will not only ensure that your proposal is given due consideration but also increase the likelihood of it being accepted by the person with Veto power.

Compliance officers

When it comes to compliance officers, they play a crucial role in ensuring that a company is operating within the established regulations and guidelines. Typically, compliance officers are responsible for preparing budgets, creating rules and policies, conducting audits, and handling other important documentation.

If you are looking to achieve success in your business, it is essential to keep these compliance officers in mind. This means that you need to ensure that your products and services align with the established regulations and guidelines, and that you are transparent and forthcoming in your business practices.

To achieve premium pricing for your products and services, it is crucial to understand the decision-making process of your customers. This involves identifying the key players in the decision-making chain, such as the decider, influencer, buyer, and consumer. By understanding the needs and preferences of the end-user, you can effectively communicate the value of your product or service to the person with veto power.

Ultimately, by fully grasping the importance of these points, you can significantly reduce the sales cycle and customer acquisition costs. This can be achieved by streamlining the proposal-to-sales process and ensuring that your products and services meet the needs of your customers while complying with the established regulations and guidelines.

Identify the options available for your customers

When developing a business strategy, it's essential to analyze the options available to your customers. You should examine the number of options your customers have in the market, as well as how many other businesses are offering the same value proposition and working on the same positioning as yours. This analysis will help you determine the level of competition in your market and how it could potentially impact your pricing strategy.

If you have a unique product or service that no one else in the market is offering, you can charge a high price for it. However, if your customers have many options in the market, you may need to be more competitive with your pricing. You should consider reducing the number of options available to your customers to increase your chances of charging a higher price.

Reducing the number of options for customers can be achieved by focusing on unique features, benefits, or quality that competitors do not offer. By doing so, you create a distinct value proposition that sets you apart from the competition, making it easier for customers to choose your product or service.

It is important to note that pricing is not the only factor that influences consumer behavior. Other factors such as brand reputation, customer service, and product quality can also play a significant role in customer decision-making. Therefore, you should focus on improving these factors as well to establish a strong presence in the market and attract loyal customers.

Pricing based on the life-cycle of your product

When determining the price of your product, it's important to take into account the current life-cycle stage of your product. This means considering factors such as the level of competition, consumer demand, and the current state of the market. By taking these factors into account, you can set a price that is reasonable and competitive, while still ensuring that your product is profitable. Whether you are launching a new product or updating an existing one, it's important to regularly review your pricing strategy and adjust it as necessary to stay competitive and meet your business goals. 

Early stage of product/ Brought product early in the market/first-mover:

In the early stages of a product's life cycle, it is often bought by individuals who are technology enthusiasts and early adopters. These individuals are always on the lookout for new products that offer them a new experience, a new design, or a new technology. They are willing to pay a premium for these products, often up to 3 times the market price, because they want to be the first to experience the product and show it off to their peers.

If you are a business that can bring a product early to the market or have first-mover advantage, then you have an excellent opportunity to capitalize on this market. Even if your sales volume may be low initially, you can charge a premium of 2-3 times more than the market price. This is because the early adopters are willing to pay a premium for the privilege of being the first to own the latest and greatest products. So, if you can get your product out early, you may have a significant advantage in the marketplace.

Brought product late in the market/ late majority/matured product:

If you are introducing a product to the late majority, which means that the market for that particular product has already matured, you cannot charge a higher price than what is already prevalent in the market. However, to sell your product, you can implement strategies such as EMI schemes, combo offers, and other innovative marketing ideas. Offering good services is also crucial to attract and retain customers.

In this scenario, your primary focus should be on gaining a larger market share. You can do this by emphasizing the unique features of your product and highlighting how it can solve the customer's problems better than the existing options in the market. By creating a strong brand image and maintaining the quality of your product and services, you can gradually increase your market share. Additionally, it is important to keep a close eye on your competitors and stay updated on the latest market trends and customer preferences to stay ahead in the game.

Drop the price at later stage

It is a widely accepted marketing strategy that businesses should gradually decrease the prices of their products. The reason being that if the price of a product is kept low in the beginning, it is very difficult to increase it later. To avoid this issue, businesses should start with higher prices and gradually decrease them over time.

By starting with a high price, businesses can target the customers who are willing to pay more for their products. These customers are usually early adopters who are willing to pay a premium for new and innovative products. By charging a higher price in the beginning, businesses can maximize their profits from these customers.

As time goes by, the product becomes more established in the market and its demand increases. At this point, businesses can gradually decrease the price of the product to target a wider audience. By doing so, they can attract customers who were previously hesitant to buy the product due to its high price.

This gradual decrease in price can also help businesses to retain their existing customers. By offering discounts and promotions, businesses can keep their customers engaged and satisfied. This can lead to increased customer loyalty and repeat business, which is essential for the long-term success of any business.

In finale, keeping the price high in the beginning and gradually decreasing it over time is a proven marketing strategy that can help businesses to maximize their profits and attract a wider audience.

When it comes to launching a new product in the market, there are several important factors to consider. Here are some key learnings that can help you make informed decisions:

1. Define the end consumer profile: Before launching a product, it is essential to identify the target audience and their preferences. This will help you understand their needs and create a product that meets their expectations.

2. Calculate the costing of your product: It's important to determine the cost of production and distribution of your product. This includes the cost of raw materials, manufacturing, packaging, shipping, and any other expenses involved in getting the product to the customer.

3. Quantify the value of creating the product: Once you have an idea of the cost, you need to determine the value of creating the product. This involves assessing the potential demand for the product, the competition in the market, and the potential revenue that can be generated.

4. Determine how much benefit you are providing to your customer and take out your benefit from it: It's important to understand the value your product provides to the customer. This will help you determine the price of the product and ensure that it is fair and reasonable.

5. Decide the price of your product based on its life-cycle: The price of a product should be based on its life-cycle. This involves considering the cost of production, competition in the market, and the demand for the product. You can start with a higher price and then gradually decrease it as the product becomes more established in the market.

6. Reduce the number of options for your customer in the market: Too many options can be overwhelming for customers, so it's important to offer a limited number of products that meet their needs and preferences.

7. Keep the prices of your product high in starting and decrease them later: This strategy can help to create a perception of value for your product and generate interest from early adopters. As the product becomes more established, you can gradually reduce the price to appeal to a wider audience.