Our next training session is about pricing. In the upcoming weeks we will post educational articles and posts about how to price your products properly.
Pricing know-how
So we’ll begin with 5,000,000 years worth of pricing
perspective…
Your new product will fail if you adopt the wrong price. Set
it too high and no one buys. Set it too low and you won’t make a profit -- and
it’s not OK to lose money forever. If you choose the right price, of course,
you still have to do a lot of other stuff right. But that’s not our job here!
Let’s do a quick historical review of pricing. We’ll end up
at the Net. Don’t groan -- we said “quick.”
In the bad old days of hunting and gathering... people
bartered. They negotiated goods or services for the goods and services of
others. Bartering is still seen in developing countries and in the “black
market” of developed countries.
As the Agricultural Revolution took hold, market places
evolved. Now that people were growing zucchini and potatoes, they needed
someplace to sell them! People negotiated a cash price on a one-to-one basis.
It’s called haggling. People still do it -- just visit any farmers’ market on a
bustling Saturday morning.
Pricing varied according to supply (good year for growing?),
demand (did buyers have much money?), and competition (merchants simply peeked
into the next vendors’ stall to see what they were charging), which all
factored into the one-on-one haggling. In other words, pricing was dynamic,
fluctuating constantly.
Then came the Industrial Revolution and mass production.
Could retail stores and the fixed price be far behind? A fixed price is where
the seller decides upon a price -- the prospective customer either buys it or
does not. No haggling. Of course, if the seller sets the price too high, no one
buys. So there still remains a system of checks and balances.
Traditional pricing policies were determined from the
bottom-up. Companies determined a cost of the product by factoring in direct
and overhead costs. An appropriate mark-up was then charged, based upon
competing pressures and “what the market could bear” (although rarely was there
science to back up that hoary old phrase).
Now we are at the beginning of the Digital Revolution.
Dynamic pricing has potential.
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A workbook with Excel models to guide you step-by-step into setting prices that will maximize your profits.
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Auctions are an interesting and efficient, non-fixed,
pricing system. Sellers put an item up for sale and buyers bid upon it.
It used to be that you had to displace yourself and meet at
a fixed time at a fixed place to participate. Not any more -- at eBay and
hundreds of other Net auction sites, you can bid and sell 24 x 7 x 365. And
auctions can also happen in reverse - - buyers say what they need and sellers
submit competing quotes, an increasingly popular B2B application on the Net.
And not only can you have “reverse auctions,” you can have
reverse fixed prices.
The customer submits the fixed price that she is willing to
pay. The company meets that price or not, but there is no negotiating or
bidding. Priceline.com is a great example where you can name your price and
save.
EwinWin is an e-commerce business that uses group buying
power to drive prices down. This type of buying opportunity even has a formal
name... demand aggregation.
commodity exchanges. Buyers bid and sellers ask. The
exchange of product for cash happens when a bid price equals an asking price.
Depending upon how large the buying and selling pressures is, prices for a
stock or commodity rise or fall.
Dynamic pricing is the next potential stage of e-commerce
development. If it ever gains in popularity and acceptance, it will change the
face of transaction-based sites forever.
What does the future hold?
Let’s consider two kinds of products...
1) Commodity -- a commoditized product has lots of
competition. Usually, there’s nothing that differentiates it from its
competitors. You compete on price. Watch for the Net to force your margins to
be razor-thin. “Bots” will haggle with you, one-toone, and aggregated demand
and markets will ultimately beat you down when they get around to bidding on
your products.
Those who execute best will win this war. Source
efficiently. Manufacture just in time. Laser-speed inventory turns. Proficient
distribution. It’s a brutal way to earn a living. So differentiate yourself and
sell...
2) Proprietary product -- it is an original product with new
and valuable benefits. The innovation can be in the product itself or in the
marketing of the product, preferably both. How to do this is beyond the scope
of this book, unfortunately.
Original products with new features and benefits stifle
“apples-to-apples” comparisons by “bots.” As a result, you can set a price that
will maximize profits. Keep in mind that markets mature rapidly on the Net --
you may have to adjust pricing frequently or upgrade your product to maintain
your price. Computer hardware is a great example of both a commodity and of a
proprietary product...
As a commodity, the PC clones are constantly upgrading and
shaving prices to fight each other. How? It’s done it through manufacturing and
marketing innovations (“make-on-demand” and selling-through-the-Web).
As a semi-proprietary product, Macintosh can no longer
afford to be far more expensive than Windows machines. But it has enough
original features and extra user-friendliness that it can still set a slightly
higher price.
One thing for sure... your competitors can be reached with a
single click of the mouse. Get the price right or perish.
Very interesting post, I definitely learned from it. Pricing is extremely important when you want your business to be successful.
ReplyDeleteI'm happy to hear that. Stay tuned for the next post about pricing. We will continue our training session soon.
ReplyDelete