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First, Best, or Different

Niche Marketing Matters
By John Bradley Jackson

Perceived Value Pricing

February 21st, 2010

“Perceived Value” pricing is pricing for a product or service at a level that reflects the potential savings, the highest satisfaction level, or the maximum use that a client will receive from the purchase and the use of the product or service. Overall, price is set at the highest level that your target market is willing to pay, given these benefits.

This type of pricing reflects a sustainable competitive advantage (SCA) where there is little or no competition. SCA is a description of what is unique about your product or solution that makes you valued in the marketplace. A competitive advantage is sustainable if others can’t copy or deliver the same thing, or if the cost or the time to develop a competing solution is very significant. Micheal Porter, the Harvard Professor who coined the term SCA, suggests that a competitive advantage is achieved when you do different things that are valued by your customer and are not available from the competition.

Pricing with perceived value pricing is niche market heaven. However, be sure that your competitive advantage is real and defensible, or you have got trouble on the way.

How much is too much to charge, when utilizing perceived value based pricing? Look for tear stains on the checks you receive from customers. If it hurts them to write you a check, then you are charging too much. If that is the case, you will need to lower the price.

John Bradley Jackson
© Copyright 2010 All rights reserved.

P. S. Greg Jordan has some similar thoughts on his blog Marketing Clique.

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The Four Dimensions of Pricing

April 27th, 2009

You must know and understand the four dimensions of pricing for a new product or start up:

1. Cost.
2. Customer.
3. Competition.
4. Yourself.

Cost drives a lot of pricing decisions, but for the wrong reasons. A typical price strategy is to mark up the estimated cost by some multiple like 3 or 4 times. The problem with this approach is that most small firms have poor or nonexistent cost accounting. Note the word “estimate”; it invariably really means “underestimate”. Enough said.

Your customers have prices in their heads—they can be high or low. These price expectations are the result of past experiences, research, or plain guesswork. In effect, the buyer sets the expectations of the price ceiling or maximum price that is acceptable. This ceiling can be raised when the customer recognizes the product’s potential value.

Meanwhile, your competition is also influencing price by their quotations, advertisements, and past pricing. In a commodity product environment, these activities can have a significant impact on the price that you might offer. For a new product or start up, the competition’s price may be of little or no consequence.

Finally, your personal expectations of price may be the biggest influence in determining price. Your past experience, product knowledge, desires, and fears can help or hinder your pricing strategy. My experience is that these personal influences invariably cause you to lower the price; fear seems to trump everything else.

Know the four pricing dimensions, but recognize that value should drive your pricing strategy.

John Bradley Jackson
© Copyright 2009 All rights reserved.

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Pricing Products Individually

April 21st, 2009

When establishing the prices for your products or services, don’t fall into the trap of establishing an “across board” price margin for all your products or services. Instead, look at each product individually.

Look at this way. You might be able to justify a lower margin for products and services that account for a high sales volume. These products and services may drive your sale volume, but because of the higher volume you might be able to anticipate increased efficiencies in their creation. Also, their cost of sales may actually be lower on these items.

Meanwhile, lower volume products and services might be better priced with higher margins. Since you don’t sell as many of these products and services, you may incur higher selling costs and you may not get the manufacturing efficiencies like you do with higher volume products.

Individual products and services need individual pricing.

John Bradley Jackson
© Copyright 2009 All rights reserved.

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Perceived Value Pricing

March 11th, 2009

Perceived Value Pricing is the best choice for niche marketers (most of the time).

This pricing strategy is defined as pricing a product or service at a level that reflects the potential savings, the highest satisfaction level, or the maximum use that a client will receive from the purchase and/or of use of the product or service. Overall, price is set at the highest level that your target market is willing to pay given these benefits.

This type of pricing reflects a sustainable competitive advantage and where there is little or no competition. This is niche market heaven. But, be sure that your competitive advantage is real and defensible, or you have got trouble on the way.

How much is too much to charge when utilizing perceived value based pricing? Look for tear stains on the checks you receive from customers; if it hurts them to write you a check, then you are charging too much. If that is the case, you won’t keep them as customers for long.

Better yet, referrals are a great indicator that your price is fair.

John Bradley Jackson
© Copyright 2009 All rights reserved.

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Price Strategically

January 5th, 2009

Undoubtedly, pricing an offering is one of the more important decisions that an entrepreneur makes, yet it is my observation that it seldom gets much thought. Pricing decisions are often emotionally based and made quickly, while prices are long lived (like it or not).

The market can dictate a price point or price range for a commodity product when it is offered by many competitors. If that is the case, you are kind of stuck with market prices unless your offering has unique characteristics or benefits.

Otherwise, there are some basic questions that you need to ask yourself about your product, the customer, and the selling environment before you establish the price:

1. What does the customer look like for the offering? What is the region or geography served? How many potential customers can be served? These simple questions will determine your channel of distribution costs.

2. How will you market the offering? Over the web? By mail? What are the costs of promotion and advertising? Similarly, your promotion mix will make a huge impact on your cost of sales.

3. Is price elasticity a factor? Does product demand change if you move prices up or down? OK, this sounds simple, but it can actually be vexing to many entrepreneurs. Lowering price does not always increase sales volume; it can be a hard lesson learned once you lower a price and get stuck with it.

4. What does your product really cost? This can be a really hard one for small firms since true cost accounting does not normally exist. Most small firms “estimate” cost and then apply a multiple of 3 or 4 to get a sales price. The problem exists in the word “estimate”, since it generally means “underestimate”. Most firms don’t capture or know all the true costs. This is a red flag waving.

5. Look outside the box. Are there any environmental factors that may impact pricing that are out of your control such as weather, legal or regulatory changes, or competitor misbehavior? They may be hard to forecast, but you need to be cognizant of the impact of these external factors.

6. Pricing goals. What do you hope to achieve with this offering and its price? Maybe you want to open a new market or drive out a competitor? Or, is the offering supposed to drive big profits; if so your product margins will need to be high and pricing defended.

With these issues researched or decided, the pricing begins. It still is a choice, but hopefully it is a more informed one.

John Bradley Jackson
© Copyright 2009 All rights reserved.

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A Moment of Optimism in Our Financial Crisis

October 8th, 2008

While the stock market appears to be in a free fall and the business press is tossing around words like depression, doom, and chaos (irresponsibly, I may add), there is cause for optimism. The good news is that the US dollar is rising very quickly in value on the world market.

Last week the dollar was at the highest level in more than a year when compared to the Euro and other major currencies. Our purchasing power has surged dramatically which means that our nation just got a raise, so to speak.

We must remind ourselves about the power of the US dollar—the US is the standard for the world’s currencies. This must sound a little crazy, but despite the fact that our debt system seems in chaos, we stand to gain much from this situation.

On the consumer purchasing front, we will win big time with better prices for foreign made goods such as consumer electronics and imported automobiles. Additionally, this increase in the value of the dollar will provide us unusual political leverage when negotiating with other nations both friendly or not.

When other nations faced a similar a financial crisis as this, invariably the value of their currency fell. This compounded the financial pain. When Asia, Russia and Mexico had a similar debt crisis, their currencies collapsed which sent foreign investors to other markets. As confidence fell, so did their exchange rates which made matters worse.

The good news this week is that the world is running to the US dollar for safety which means we get the spoils. Heed my words: the good times are coming back.

John Bradley Jackson
© Copyright 2008 All rights reserved.

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Pricing Below the Market

September 30th, 2008

Pricing below the market is a technique used by giant mass market firms to take market share. Also known as “penetration” pricing, this is a strategy where a provider sells products below market price to break into a market or to take market share. When enough competitors are scared out of the market, the giant firm will raise prices and recoup lost profits.

This is what the Japanese semiconductor makers did in the 1980’s; buoyed by a lower cost of capital and a government-sponsored long-term objective, taking market share from the U.S. semiconductor firms was the worth the short-term losses. You may recall that the U.S. manufacturers called foul on this practice and referred to it as “dumping”.

Nonetheless, Japan emerged as a major player in the semiconductor memory chip business and pushed many U.S. suppliers out of the business. The risk paid off for the Japanese semiconductor industry.

This is a very interesting tactic, but hardly a tool for niche marketers like you and me. My advice is to price on value and keep the focus on customer needs.

John Bradley Jackson
© Copyright 2008 All rights reserved.

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Price Skimming is Not Sustainable

September 17th, 2008

Price skimming refers to the pricing of a new product or service at a very high level (while you can get away with it). This type of pricing is often deployed for a product which has a competitive advantage that is not sustainable. This happens a great deal in technology when an innovative product first captures the customer’s attention and the competition later follows.

Another reason to set an initial high price is to establish the new product as a prestige or a high quality product. Buyers have been taught that quality comes at a higher price, so in a weird way buyers are comforted by the higher pricing.

Alternatively, when you begin with a high price, you have room to move down in price with the anticipated entrance of competition. To generalize, most prices go down when competition joins the fray. This logic suggests that you should anchor with a price high and prepare to negotiate.

An example of skimming would be the DVR (digital video recorder) product called TiVo, which has revolutionized watching television. Early on, this was a product for the early adopters and TiVo products commanded a premium price. Competition entered the market and prices softened. Soon all satellite receivers will have DVR features. Game over.

However, skimming is not the preferred pricing method for a niche market player. Niche marketers create value based on a sustainable competitive advantage and a partnership with the customer. The customer values the offering above other alternatives and considers the pricing fair.

Pricing on value is a better approach for niche players.

John Bradley Jackson
© Copyright 2008 All rights reserved.

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Niche Marketers Price on Value

September 15th, 2008

“Perceived value-based” pricing is pricing for a product or service at a level that reflects the potential savings, the highest satisfaction level, or the maximum use that a client will receive from the purchase and the use of the product or service.

Overall, a perceived value-based price is set at the highest level that your target market is willing to pay, given these benefits. This type of pricing reflects a sustainable competitive advantage where there is little or no competition. This is niche market heaven.

However, be sure that your competitive advantage is real and defensible, or you have got trouble on the way. How much is too much to charge, when utilizing perceived value based pricing? Look for tear stains on the checks you receive from customers. If it hurts them to write you a check, then you are charging too much. If that is the case, you won’t keep them as customers for long.

An indicator that your pricing is accurate would be referrals—if you are getting referrals, you are priced fairly or you have an opportunity to increase prices. If your customers complain about pricing and leave, you have priced too high or you are not delivering the promised value proposition.

Pricing should be fair for both buyer and seller.

John Bradley Jackson
© Copyright 2008 All rights reserved.

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Skimming: A Pricing Strategy For New Products

April 29th, 2008

Price skimming is a pricing strategy which utilizes a high price for a brief period of time; this type of pricing is generally used with the introduction of a new product. The purpose of this pricing strategy is to “skim” the profits before the competition enters the market.

When TiVo launched its early DVR products they commanded a substantial pricing premium in the market with the early adopters. This premium helped pay back TiVo for the R&D costs associated with the creation of the new product and the new market. Where a highly innovative product is launched, research and development costs are likely to be high. This includes the costs of introducing the product to the market via promotion, advertising etc.

Yet, there are other reasons for establishing a high price. A company can build a high-quality image for its product by charging high prices initially. This is especially true for luxury products which can benefit from skimming since the buyer tends to be more ‘prestige’ conscious than price conscious. To this buyer the high price denotes quality.

Similarly, where the quality differences between competing brands is perceived to be large, or for offerings where such differences are not easily judged, the skimming strategy can work well. An example of the latter would be for the manufacturers of “designer” watches. Buyers of Rolex watches expect to pay more for the brand; it is almost as if they demand it.

The beauty of skimming is that the price can be lowered later if necessary. The converse is seldom, if ever, true. Once you educate the market about your price, raising the price is damn near impossible.

John Bradley Jackson
© Copyright 2008 All rights reserved.

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