In the stock market, price reflects all the available information about any equity, says the efficient-markets theory. For other products, it's getting ever more complicated. "List price" is dead. Dynamic pricing algorithms spew myriad tags for the same product over days or even hours. How can you get to the right price for your product or service?
After using clunky software while working in a chemical plant, Ryan Chan, 25, launched Encino, California-based UpKeep Maintenance Management, which allows mobile- and iPad-dedicated tracking of work orders at factories and commercial and residential buildings. He initially offered UpKeep freemiums, a set of features from the app's premium product, for $10 a month. Traction soared; sales didn't. Last April, Chan changed tactics. He offered two higher-priced subscriptions: one for $25 a month, with free trials of UpKeep's top version, including inventory management and a jobs-request portal; and one for $40 per month, for the premium model. Lifting prices boosted subscriptions. "It was a scary transition, but we're going after tech-savvy customers who see the value in using all of the app's features to handle their workload more efficiently," he says. "Our prices align with the quality." Get on the path to proper pricing.
Where to start?
The initial price matters. A lot. "The first price is very important because it frames the product or service's value and worth and also sticks in consumers' minds," says Z. John Zhang, professor of marketing at the Wharton School and co-author of Smart Pricing: How Google, Priceline, and Leading Businesses Use Pricing Innovation for Profitability. Allen Adamson, owner of Brand Simple Consulting in New York City and author of BrandSimple: How the Best Brands Keep It Simple and Succeed, says many entrepreneurs don't realize how critically important price is to branding. "Price signals quality and what market tier the product or service will compete in to both entrepreneurs and consumers," he says. A lot of confusion stems from entrepreneurs' not distinguishing between a product's fixed and variable costs, says Zhang. A beverage manufacturer's bottling machine is a fixed cost, but the plastic bottle is variable--ultimately tied to the price of oil. And you could potentially find a lower-cost substitute.
Higher or lower?
Financial advisers often offer the same drastic advice to firms struggling with revenue: Raise prices or sink. Dicey proposition, that. "Just because your margins don't cover your costs doesn't mean you should automatically raise your prices," says Zhang. Higher pricing can become a vicious cycle of demand rationing: Customers leave, so you raise prices again to cover the shortfall. However, a lower price doesn't necessarily translate to a revenue surge. "It depends on what goods you're selling, how frequently people need to buy the item, and how actively people are searching for low prices," Zhang says. Chris Herbert, co-owner and CEO of TrackR, in Santa Barbara, California, which designs Bluetooth devices that help people track their possessions, first asked consumers the maximum they'd pay for one device. "Once we had this price point, we created bundles," Herbert says. "Just like at Costco, the more products bought, the bigger the discount. Purchasing a 10-pack is like getting six for free." It's the perceived value that clinches the sale.
The pricing game is played differently in different industries
Skin cream: Anything goes
Pricey cosmetics, such as SkinCeuticals CE Ferulic, are among the most promoted categories: SkinCeuticals: $163; SkinMedix: $149; The Beauty Place: $115; Beautance: $110
Airline seat: Dynamic
Airlines and online retailers use dynamic models that change prices rapidly and don't always seem logical--unless you're an algorithm. Here's a nonstop New York to Los Angeles round trip priced on November 1 on Kayak for November 17 to 20: JetBlue: $617; American: $1,147
Weber grill: Price discipline
Weber can enforce pricing. If you advertise for less than the set minimum price, your supply could get restricted. It's every manufacturers dream--and legal. The Ranch Kettle 37-inch grill is $1,299, whether it's at BBQGuys.com, Target, Home Depot, Walmart, or elsewhere.
Root canal: Location based
"The range--$400 to $3,000--is typically due to differences in regional economics, with the lowest costs in some areas in the Midwest and Appalachia and the highest fees in large cities," says Michael Plambeck, owner and CEO of Emergency Dentists USA, a network of dentists who treat emergency walk-ins.