27 September 2013
Day 117: Influence of the price
Yesterday I participated at free webinar of Slovenian marketing guru Aleš Lisac where he talked about the price setting of the products. It assisted me a lot in realizing some facts that I thought before were quite different. I will now be able to be more confident at sales activities of the product that I am marketing. The conclusion is that most of the time we do not think very much about the price of the products we buy. We buy it simply out of convenience, because it was there, on our path, near other things and places and times where we usually buy our stuff.
The biggest mistake that he pointed out was that when sales are not as expected, we lower the price. This act produces very bad psychological message to the potential buyer and it also diminishes the profit of the seller a lot. Price reduction is actually lack of imagination about other possibilities. The price is basically never the problem and the best practice is to enhance the quality of packaging or create a product with even larger price. This is because price is never in a vacuum, it is always relative to prices of other similar products.
So if for example your main product costs 100 € it is best to produce just a bit larger or better variation and price it significantly higher, like 200 €. Immediately the primary product would not anymore be regarded as expensive but quite cheap, regardless of what it is. Improved looks, design or packaging also influence very much what the price range can be. For example average book costs 25 € however the special issue of the Bible produces by our famous print company sold it for the price of 2.000 € and was treated as collectors item. The other example is a dog shed which costs about 100 € however there is a producer of dog sheds with starting price of 20.000 € and they do sell very well.
There are also certain psychological price levels that influence very much how much each type of product will sell and they have to be tested. Also a very wide variant selection of one product can bring to confusion and consumers have hard time to decide. And the most challenging way of selling is one on one personal direct sale when the customer can find out very quickly if the salesperson believes that the price is too high. Also one must never judge the price based on own buying power since they are people who can afford your product even if it is too expensive for you to buy it for yourself.
Other ways of improving sales is to improve the product line, to sell in batches, to add some kind of bait, to offer terms or installments, to make product more exclusive or to hire a celebrity. Salesperson must be skilled in noticing when the person has already decided to buy the product and then not get benevolent beyond what is necessary. The strange rule of thumb is that there will be always people who will claim that the price is too high, even if you drop it just to production costs. So the rule is to raise the price until the share of people who complain about the price gets to about 20%. Of course if the share of complainers is more than 50% then one might consider that the price is actually too much or that the value of the product has not been presented properly.
The best way to justify the price is to find out what is the cost of the problem that your product is solving. The value of the product is thus never the production price but the potential money savings if the product would be purchased and used. And also the price is relative to the budget or context of the product or service that you offer. For a client with low budget your product would be considered expensive, but for the well funded client, no price is no matter. Also one should ask the client what characteristics of the product or service they desire.
And the strangest point that Mr. Lisac exposed is that many companies, especially startups go bankrupt because the price of the product is too low. One must always consider many costs, like production, marketing, accounting, salaries etc. so the profit margin has to be high enough to cover all expenses. One must calculate how much is needed not only to produce the product, but also how much money would be necessary to sell the product. For example there were two producers of the fitness device that both enable the same functionality. However the first one was prices 600 € and the second one 14.000 € and they both sell. The difference is that the advertising budget for the first model of device is only 200 € but for the second one is 13.000 €. So the produces of more expensive device can invest 65 times more expensive advertisement and thus also succeed in sales.