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What is the right price?

What is the right price?

12 October coverThis article was written by Ed Hatton for the column the Start up Coach and published by the South African edition of Entrepreneur magazine in October 2012 and is posted here by their kind permission.

 

Focusing on pricing will pay dividends to start up entrepreneurs

 

 

Challenge

This entrepreneur asks where he can find help in setting prices for advertising space on digital displays and which procedures he should to follow before deciding on the right prices.

Response

Setting the most appropriate price is important but not easy to do. It needs at least as much attention as any of the other ’4Ps’ of marketing. Start up entrepreneurs traditionally spend most of their effort on product development, put time and thought into marketing promotions and sales channels and not enough time and effort on pricing. Price is important in almost every buying decision so it can be as crucial as the product features in securing the sale.

There are many different pricing strategies and methods; they are widely published in books and blogs so entrepreneurs can educate themselves. Most small businesses will use one of the following three basic pricing methods.

Cost plus

A mark-up to cover fixed costs and profit is added to the cost price. This method works best where sales volume is reasonably predictable and the item cost price can be accurately calculated. In areas like digital media where there is a high fixed cost of the screens, and no certainty about what percentage of the possible adverts per screen will be sold it becomes more difficult.  The same is true of all types of media, B&Bs, transport, entertainment and many other business types.

The entrepreneur has to decide what percentage of the advertising he thinks will be sold and then calculate the price which would cover costs and show a profit. There may be a temptation to load early bookings with higher prices so the cost recovery comes about sooner, but this is risky.

Positioning

Setting prices as a positioning statement against prices charged by competitors is another pricing technique. Setting the same price would indicate that the offering is about the same, a higher price suggests a premium service. Clearly the entrepreneur still needs to make a profit, so the price cannot just be set at any level. There are some dramatic examples of prices making a statement against competition –branded shoes, sunglasses, drinks or hotels may cost many times the price of similar items, although the product has similar functionality. These prices signify exclusivity, quality and prestige. At the other end of the scale low cost airlines pricing suggests no frills, less legroom and limits on making changes to bookings.

If this pricing method is chosen the entrepreneur has to continually check competitor’s prices – and his own profitability and cash flow. In setting prices using competitor’s prices the entrepreneur needs to be aware of who the competitors really are; digital advertising competes with other digital media providers but also print, radio, internet advertising and e-mail, social media and telesales.

Perceived value

Pricing for the value the customer believes he will enjoy is theoretically the perfect way to price, but it is dangerous to guess what that perceived value is – rather ask some prospective customers what they would pay for a product or service if it were offered to them. Formal market research is valuable although it is expensive, but research will be a lot cheaper than business failure.  Testing price levels in a pilot project and then surveying buyers can give good results. It is easier to price a highly differentiated product or service this way. Think of having the only digital advertising screens at Soccer City on the day of a Pirates / Chiefs match. Setting the price per advertising slot would bear no relation to costs or competitors pricing; it would be based on the extremely high perceived value to advertisers.

The right price is likely to be one which takes all three considerations into account. An absolute requirement is to be able to provide potential customers with accurate data about how many people will see the advert, viewer’s reaction and exclusivity of the display position. Always test pricing with pilot projects, for instance making limited sales in niche areas to test price acceptance.

© copyright Entrepreneur Media SA (Pty) Ltd. All rights reserved. No part of this article may be reproduced, stored in a retrieval system or transmitted in any form without prior permission of Entrepreneur Media (Pty) Ltd.  Permission is only deemed valid if approval is in writing.

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