Winning products are those which, after paying all "cost-of-goods-sold," provide reasonable value to the purchaser and reasonable profit to you. The product should also allow profits to retailers and Reps and enough of a margin to allow sales through wholesale distributors and accommodate supplier price increases.
Pricing tends to create quick and drastic actions and reactions from present competitors, especially those ready, willing and able to move quickly to alter their own price structures.
Pricing structure and policy is generally dictated by:
• The nature of the buyer• The features, advantages and benefits of the product
• The nature and condition of the overall market
• The proposed channels of distribution
• The number and cost of point-of-purchase displays which will be required
For instance, pricing a product in a very price-intensive (price-driven) market will be much different than selecting a pricing structure in a noncompetitive market where there are no substitutes for the product.
In the competitive market, the innovator will be forced to closely examine the competitors' pricing structures and attempt to anticipate what the competitors reactions will be before setting a price for the product.
The one mistake you must avoid at all costs, even in a price-driven market, is to price your product so low that it discredits the intrinsic value of the product. This mistake is sometimes made by manufacturers who are selling their well-known and well-advertised brand name product through one channel and then attempt to sell a "private labeled" brand of the same product through a different channel.
But the price may be so low that the consumers perceive that a product of this type should cost more and therefore they believe the private label product must not be any good. In a non-competitive market, the innovator will try to set the price as high as the end users perceived value will allow.
For this reason, the product evaluator should ALWAYS conduct a focus group of prospective buyers and sellers of the product before locking in an initial price and again before altering the price during the product life cycle.
In the focus group, the inventor will NOT ask the group "how much would you pay for the product," because that question will net only subjective answers which will vary widely with the individual. Instead, the question should ALWAYS be:
"HOW MUCH WOULD YOU EXPECT TO SEE THIS PRODUCT COST IN THE PLACE WHERE YOU WOULD GO TO BUY IT?"
Or (For retail sellers and distributors):
"HOW MUCH WOULD YOU EXPECT TO SEE THIS PRODUCT PRICED IN BUSINESSES SIMILAR TO YOURS?"
Asking the question in this fashion will eliminate a great deal of the subjectivity and will net you much more accurate "real-world" pricing figures. Once you've determined the buyers' and sellers' ideas of perceived value, you must then look at all the other factors before determining a final price.
THE FACTORS FOR DETERMINING PRICE STRUCTURE ARE:
1. The buyer's perceived value of the product.2. The seller's perceived value of the product.
3. The perceived level of appropriate compensation for all the various middlemen, reps, retailers, etc.
4. The cost-of-goods-sold of the product (cost of manufacturing, promoting and distributing the product). Note: Be sure to use the lowest production quantities you will ever run, even at startup, to calculate your cost-of-goods-sold or you may end up with low or no profit margin. Be sure to include the cost of point-of-purchase displays.
5. The overall condition of the marketplace and market segment you will be selling in.
6. The competition's present pricing structure and your best guess at how your competitors will price their products once you enter the market.
7. The profit or rate of return you (and your investors) desire.
8. The expected life cycle of the product (how long you will be able to sell it. For instance, fad items have a very short life cycle).
9. The prices of other products in your line, if any (it would not be a good move to have a low-priced product line have only one very high-priced product in it).
10. Government regulations and agencies that govern the manufacturing and sales of your product, including tax rates.
11. The cost of liability insurance if your product has any chance of harming anyone.
Be sure to consider ALL of the above factors when setting a final price for your new product.
The above article was taken from James F. Riordan's classic book, HOW TO EVALUATE THE POTENTIAL FOR SUCCESS OF A NEW PRODUCT OR TECHNOLOGY. Riordan's highly-acclaimed, 36-point system is a valuable tool for inventors, product evaluators or anyone interested in the invention process. Each section is followed by a comprehensive questionnaire that can be used to evaluate your product.
The highly-recommended book can be ordered by contacting the James F. Riordan Company, 3110 Camerosa Circle, Cameron Park, CA 95682. The company can be reached by phone at (916) 676-4729. The book may also be ordered through the Dream Merchant, 2309 Torrance Blvd., Suite 104, Torrance, CA 90501. The phone number is (310) 328-1925.
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