It's All About Value
The most common mistake in pricing involves setting prices by marking up costs ("I need a 30% margin"). While easy to implement, these cost-plus prices bear no relation to the amount that consumers are willing to pay. As a result, profits are left on the table daily.
The key to better pricing involves setting prices that capture value. Manhattan street vendors understand the principle of value-based pricing. The moment that it looks like it will rain, they raise their umbrella prices. This hike has nothing to do with costs; instead it's all about capturing the increased value that customers place on a safe haven from rain. The right way to set prices involves capturing the value that customers place on a product by "thinking like a customer." Customers evaluate a product and its next best alternative(s) and then ask themselves, "Are the extra bells and whistles worth the price premium (organic vs. regular) or does the discount stripped down model make sense (private label vs. brand name). They choose the product that provides the best deal (price vs. attributes).
Key attributes that differentiate a product include:
- Physical Attributes
- Ease of Purchase