Pricing’s Role in Product Development

November 5th, 2009 by Rob Berman Leave a reply »

Good products and services can and should succeed in the marketplace.  However, mispricing a product or service can kill that quality offering.

Pricing Too High

Pricing the product or service too high will create a barrier to trial.

1) Thought leaders will not share their thoughts on your product or service.

2) If the product or service is not sampled, then no buzz is created.

Pricing Too Low

Sales may exceed plan because the price is too low.  The downsides are:

1) lost profit per unit because of lower than necessary pricing and

2) production costs and capital expenditures may rise to handle the volume.

The movie Field of Dreams had the theme “Build It and He Will Come”.  Yet, in reality, customers do not work that way.  Customers must perceive value for money or they will not pay a sufficiently high price to cover the costs to produce the product or service plus a reasonable profit.

Product-Out Process

The historical approach to Product Development includes a number of steps as part of the process.  Think about the following steps tied to determining pricing.

  • Product Concept Generation
  • Concept Refinement
  • Generate Sales Forecast
  • Assemble Cost Estimates
  • Product Developed and Priced

The flaw is that the cost plus pricing required may result in a final price that a customer is unwilling to pay regardless of the actual costs to manufacture or provide the product or service.

Customer-In Process

More focus on the customer pain points and perceived value creation of your product or service allows a different pricing approach.

Consider a manufacturer of industrial lubricants.  Will that lubricant reduce the frequency of breakdowns or extend the life of the machinery?  If the customer perceives a reduction in cost or a way to increase revenue, then they will be more inclined to purchase your product.

Customers are comparing your product against the universe of existing solutions to their need(s).

Pricing Universe

If you understand the relative value that your product or service brings it helps you set a probable price range.  Given the price range, a maximum cost structure can be established that allows the desired profit margin to be achieved.

The result is an increase in times achieving the required profit picture in your portfolio of products and services.

The Takeaway

A customer-in approach to pricing allows a more accurate cost model and attaining the desired profit margin.

Those are my ideas.  How do you feel?

  1. Do you use a product-out or customer-in model for pricing?
  2. How accurate are your pricing models?
  3. How consistently are you achieving your profit margins?
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