There’s a perpetual dilemma for businesses, especially those who are just starting out – How to price their products? Do they sell it at what it’s worth, and risk being priced out by competitors? Or do they forego profit, sell it below the competition, and hope to get a slice of the market share? There’s no right or wrong answer, but this situation sure is a delicate balance. Instead of debating how best to price your products, perhaps you should first ask yourself this – what’s it worth? What’s the value of your product?
Compare And Contrast – Value Vs. Price
Value denotes the worth of a particular product, usually described by the amount of money the product is worth. Price, on the other hand, is the amount of money you’re expected to pay to purchase the said product. In short, value is intrinsic motivation, while price is extrinsic motivation.
So what’s the difference?… Toh-may-toh and toh-mah-toh, aren’t they both essentially the same thing?…
Explicitly, yes, they both mean the same thing. They measure the amount of money needed to be exchanged for the product. But what they both imply are two totally different animals altogether. Let’s put the meaning of these two words into perspective. Let’s take a look at two typical examples :-
(1) Toyota Camry
A brand new Toyota Camry carries a price tag of $150,000 (replace with your own currency where necessary). But the actual price that you pay can be, and in most instances are, slightly below the price tag. You’d probably only pay $138,888 for the said car. In this example, the value of the Toyota is $150,000, but the price is $138,888. In all essence, the difference is negligible.
(2) BMW 525i
A brand new BMW 525i carries a price tag of $250,000. Likewise, you’d probably only pay $225,999 to purchase the said car. In the same instance, the value of the BMW is $250,000, but the price is $225,999. Just like the Toyota mentioned above, the difference is also negligible.
When viewed in isolation, they’re both measured by their own little yardstick, completely independent of each other. But what if they’re both measured by the same yardstick? What if they’re comparable? What then will their value vs. price be measured against? Would you say that the BMW has a higher value that the Toyota?… Of course you would!…
Value Vs. Price – The Dilemma.
For the sake of discussion, let’s assume your local BMW dealership is having a fire-sale. Lo and behold, a spanking new BMW 525i is now available for sale at $150,000…
Let’s pause for a minute, and take some time to digest all these information. What’s the value of a brand new BMW 525i? Logic would tell us that its value of $250,000 never changed. What changed was only the selling price, the amount of money you’ll be parting with if you wish to purchase the said car.
So let’s insert another variable into the equation. Let’s say that you have $150,000 put aside to purchase a car. And you’re given two choices, a Toyota Camry at $148,888 and a BMW 525i at $150,000. Which car would you buy?… It’s a no brainer, right?… Of course you’d go for the BMW…
Ahhh!… But why?… Well, the sole reason, also the biggest reason, is that you’re paying a lesser amount of money to purchase something that’s worth a whole lot more money… Now you see the difference between value and price?
Okay, But How Does It Affect The Pricing Strategy For A Small Business?
Small businesses, particularly new businesses, often face difficulty in tagging a price to their products. Say for example that you’re a home-based business, making specialty soap by hand, and selling them in small batches. Let’s say that your raw material cost comes to $5 a piece. Factor in your overheads, say another $5 a piece. Hence, your total cost price is $10 a piece.
A quick look at an equivalent competitor, and you see that they’re selling specialty soap at $25 a piece. Therefore, you know that the value of your soap is also worth $25 a piece too. So you set your heart at tagging your handmade soap at $25 a piece, except…
You also take a look at a factory made, commercial equivalent product, a branded soap. It’s retailing at a mere $2 a piece!… Logic tells you that it’s made of inferior raw material, and it’s being churned out by the thousands in a production line. Hence, its cost price ex-factory is probably less than $0.50 a piece, making it totally logical to retail at $2 a piece. But how does your product, now priced at $25 a piece, compare to the commercial product, which cost a mere 10% of your selling price?…
Potential Solutions :-
(1) Sell It At What It’s Worth (i.e. At Its True Value)
You figure your product is worth $25 a piece. So you decide to stick to your selling price of $25 a piece. You’ll most likely face the problem of market penetration. Customers are generally cautious of new sellers. Even more so if the product is priced higher than average. You’ll most likely end up with slow moving sale.
(2) Price It Aggresively (i.e. Below Its True Value)
You decide that you want to trade profit margin for market share. So you decide to price your product at $15 a piece. You hope to eventually raise the price up to $25 a piece once you’ve got a solid footing in the market. Unfortunately, it’s still six-and-half times more expensive than the factory made soap, hence you still can’t reach out to these customers. Customers who are existing users of handmade soap might be attracted to your lower, introductory selling price. But the moment you try to increase your price back up to $25 a piece, they’ll most likely switch back to their original seller. And the whole process leaves you high and dry…
Why, you ask?… Well, because your soap is only valued at $15, but being sold at $25. Whereas their original seller sells their soap that’s valued at $25, and is being sold at $25…
The Ultimate Solution
You might have realised from the example quoted above that there’s no guaranteed solution. But there is a way for you to penetrate a new market with a new product, without artificially suppressing its true value.
Establish the true value of your product. Then keep emphasising on its true value. Announce it to the market, and make your entrance as grand as you can afford to… And when it comes to actually selling your product, hold an introductory promotion, and price it below the true value. Just make sure that you openly announce a limited duration for the introductory promotion (say two or three months). Then blast advertisements into the market, and make a grand entrance. Emphasise the need to “hurry, before stock runs out”, and the selling price goes back to its “original” price, which happens to be its true value.
That way, you get to penetrate an established market with an attractive price, and still keep its true value intact.
Still Unsure How To Do it?
It all boils down to how you project your brand image. Maintain your brand identity, your brand value, and it’ll ultimately reflect a good reputation and integrity. Maintain a slightly higher-than-average price point, but emphasise that you’re selling it at “below market price”, and for a “limited time only”. That will peg the true value of your product, while making your products appear more affordable.
And if you still need help, look us up. Buy us a cup of our favourite coffee, and we’ll share the secrets of how to penetrate a market while keeping your value intact.