One of the enigmas of product development and marketing has to be setting a price. This is because prices in today’s world are never fixed; they vary depending on perception, macroeconomic and microeconomic interactions as well as product and industry life cycle among other factors. Therefore, prices have to be set surgically after considering an array of factors.

In many cases, consumers evaluate pricing relatively based on whether or not the product is in the highest or lowest category as opposed to the absolute or specific price of the product. Based on their evaluations, they decide whether or not the deal before them is fair. So, the biggest driver of pricing is context!

Considering the consumer

Usually, consumers are swayed by low price guarantees, they readily rush at them without even verifying from other shops whether or not they are actually getting the lowest price. They leave the place of purchase with internal reference prices recorded in their memories with which they will evaluate all similar products. Consumers are so sensitive that they subconsciously reduce the internal reference prices of brands that are frequently promoted, so entrepreneurs and the like should be careful about discounting.

Perhaps, the biggest demonstration of just how relative prices are will be the dynamics of smartphone economics. A luxury brand like the Apple iPhone will usually be priced as high as $499 upon release, but within months, the price falls and becomes a mere fraction of the original price when the next model gets released. For instance, the iPhone 5S fell down to $99 and the 5C model was available for free after the iPhone 6 was released, whereas these units were priced as high as $299 or more when originally released just the year before.

So, what matters the most is whether or not the customer is satisfied and likely to spread your brand via word of mouth after making the purchase. And, in these times of robust varieties and options, this can be hard to achieve. A price is more than just a number that indicates how much to pay, it sends all sorts of signals.

Professor David Bell of the University of Pennsylvania reveals; “for instance, more shoes are sold at $49 than $44 because people perceive the $49 to be a discount from $50, but $44 is perceived to be 10 percent more than $40, which is a bad thing.”

The key factors

So, how do you go about pricing your product? There are four key factors to consider.

First off, establish the marginal price of the product which is the price that is above the marginal cost but below the total cost that covers overheads. This becomes the pricing floor as whatever price you choose should not be below this point, else you’ll be running at a loss.

Next, determine the customer willingness to pay (WTP) and make this the ceiling, the maximum price point you charge. This should ideally be done before production so you get a good feel for whether or not your product will make you cash flow positive. Note that you cannot always charge at this level though for reasons explained in the next factor.

Examine the competition and the prices they offer for similar products. Understand that, except you have a strong competitive advantage or unique selling attribute, you should not price above the competition. As a matter of fact, if you’re just trying to penetrate the market with zero competitive advantage, you must almost always price below the competition like Techno does for its phones.

Lastly, give some margin by considering the amount by which prices have to be raised for distributors and resellers to be motivated enough to sell.

Whatever price you finally choose, it should be somewhere in between all factors mentioned above. Happy Pricing!!

By Emmanuel Iruobe