How Much Is It Worth? Fixing the Right Price

Suppose you want to buy a electronics gadget, for example, a television, you walked into different stores to check how much it cost for you to make the purchase. Most of the time, you will encounter many brands of television imbued with different specifications that comes in all shapes and sizes. Whether it is a 42″ flat screen television or not, the real variable which cross your mind is usually the price of the product. How do you set the right price for your product?

Why is the price of the product so important to most consumers? It is because as a consumer, you associate a value to decide whether it is worth purchasing the product. You debate within yourself to calculate whether the price of the product matches the many features which comes with the product. Simply put it in plain English, is this product worth the price that it is sold? Of course, we know that the manufacturer and the retailer want to make a profit out of you. The question for the consumer will be: what is the maximum profit I am going to allow this people to make?

Hence it is now appropriate to introduce the topic which I am going to talk about in this article. We define the price of a product to be the assigned numerical monetary value of a good, service or asset. This definition is accepted in both economics and business. Pricing is the manual or automatic process of applying prices to purchase and sales orders, based on factors such as: a fixed amount, quantity break, promotion or sales campaign, specific vendor quote, price prevailing on entry, shipment or invoice date, combination of multiple orders or lines, and many others.

For an entrepreneur, pricing is one of the most difficult skills to pick up. Someone once commented to me that pricing is both an art and a science. It is a science because you rely on information of markets and knowledge of the competition against your product to determine an approximate value for your product. Of course, it becomes an art when it is a totally new product that has a first mover advantage. When that happens, an entrepreneur relies on intuition to make a smart guess for the value of the product.

Based on reference [1], I will explain the value decoder framework to help you to determine a product’s value. The framework should give you a headstart in analyze the components that make up the value and shows you how you can translate the analysis into the right price for your product. To ensure that you get the correct price, this concept minimizes the error in setting the best price for your product. Once you figure out that number, the next step is to find the correct pricing strategy and bring your product to the marketplace.

In the scientific aspect of the pricing game, numbers are very important. For example, going back to the television case, what is the cost price in assembling a 42″ flat screen television? Let’s assume that you know the market price of the 42″ flat screen television and each fully-assembled television costs between the range of $2999 to $3499. The two questions to ask will be: “What is the minimum cost to assemble one television set?” and “Assuming that I know the minimum cost, how much profit will I want to make that will match the expectation of the consumer?”

We introduce value decoder framework (by Rafi Mohammed) in five steps:

Step 1: Price and Availability of Substitutes
The first step is to identify potential replacements for any product. These substitutes are what customers will compare and contrast your product to. The strategy is to make sure that your product adds more value than your competitors. This assumption only works if branding is not taken into account.

In this flat screen case, let’s suppose that there might be a 3D flat projector TV that might eventually replace the 2D flat screen. Of course, this assumption takes into account of a possible future piece of technology. If you think that this example is not good enough, I recommend that you think of the days where you use a flim-based single lens camera (SLR) and the technology which replace this kind of SLR is the digital SLR camera.

Questions to ask yourself: Your price is based on what close competitors are charging. How much are they charging? If they alter their prices, how much will you change yours? How will competitors react if you change your price.

Step 2: Characteristics relative to Competitors
Next, we have to understand how your product measures up in term of attributesm, against those of your rivals. Companies have to understand how customers value their product’s differences (relative to competitors) and price accordingly.

Going back to the flat screen television, let’s suppose that there are two companies like A and B are producing the same flat screen TV (which I term product A and product B respectively). Let’s assume that B has a better way of managing content and can interface with a computer better, for example, playing and screening media content. The advantage can be used to price product B better.

In this step, you also look at the branding process of the product. There might be a chance that your competitors may produce a good marketing and branding strategy.

Questions to ask yourself: List all of your product’s competitors. How do your product compete to your rivals in terms of quality, attributes, brand, convenience, service and style? What price premium or discount should you set relative to the competitors if you account for these differences in characteristics.

Step 3: Income
Income is important for a product’s value. As income increases, consumers are generally willing to pay more for a product.