A question that comes always back from our clients is how to set up the prices of their products (this is less relevant for services). What I’m really astonished about is how some entrepreneurs go candidly about defining their sales price.
Two opposed ways but only one valid
Take the example of this would-be entrepreneur that want to open a store (it’s a true story). He needs money from the bank and I was challenging him on how he would convince banks that his financial plan took the right figures into account; in particular how was the average amount spent by customers defined in the financian plan. His answer was very candid and would have mean an immediate elimination in terms of financing. He said by and large that the selling price was defined taking the costs into account and applying a margin of x to them. WRONG! This makes no sense because it’s a bottom-up approach that takes only the interests of the firm into account. Yet the product is purchased by a consumer and the pricing MUST reflect the value he/she perceives.
Adopt a Top-Dow pricing approach
The right approach to define a pricing is the following.
First of all do your homework and conduct a competition analysis to understand how the market is segmented. There are many criteria that you can use to segment the market (this is a usual market research technique); price is one of them.
Second you should use a panel of consumers to evaluate the value perception of your product(s). Use similar products, put them next to each other, and ask the consumer to:
- classify (in ascending or descending order) the products according to the value they perceive
- put a price tag on each of them OR use a scale (from 0€ to 100€ for instance) to position each product
By following the above approach you’re doing the right thing: your start from the consumer perspective and then adapt your business model so that you can meet the financial imperatives.
Advice for your market research and your business plan (be it in Brussels, Belgium or elsewhere)
Never assume the consumers perceive the value of what you sell. You should always assume, even if it’s hard to admit, that you are 100% wrong about what drives consumers’ choices. Rather than building hypotheses on your own, look around and use customer’s knowledge to reinforce the credibility of your business plan. This is the only way to have a chance to get your project financed.
Posted in Entrepreneurship, Marketing.
