DARE - Because Entrepreneurs Do

The startup team got to have a clear idea of the cost incurred while deciding on the price of the offering. Selling lower than the competition may not always be a great strategy

It is every entrepreneur's dilemma when it comes to deciding the price of his/her product or service.

It begins sometimes from the idea stage itself when one compares its own offerings with that already available in the market. But looking at the competition for pricing even before your idea has taken shape may not be the best thing. This is because you could be influenced by what your competition is offering. However, it can help in getting some sense of the cost of development of your product or service. "I suggest you use target cost. First you and your sales and marketing people develop the product features and price that can compete with your rivals, then you determine the margin together, finally the technical and production people study the possibilities to produce this product within the determined cost," says Duke Yang, controller at Hansgrohe in China in a reply to a question on LinkedIn.

Factors Affecting Pricing Strategy Cost
It is one of the most important part of determining the cost of your offerings. These would include both fixed and variable costs. Fixed costs would be that of employee salaries, rentals, cost of machinery, taxes, etc. Variable costs are those that fluctuate due to market forces such as the cost of raw material, wages, etc. Adding your margin to the cost incurred would help determine the price. "Before a product or service reaches the customer, a number of cost accumulating activities have taken place. These have to be calculated and taken into account," Mogens Thomsen, entrepreneurship evangelist in Denmark. But also other pricing factors must be taken into consideration before choosing the optimal sales price, he says.

Value
As an entrepreneur you should not confuse cost with value because the two could be fairly different. Value is what extra does your product or service offer. "The starting point of this analysis is value. What is the value of the product or service to the customer? Does it save them money or time? Then look at the competition and decide if they are value-priced or cost-based pricing," says Gary Ambrosino, COO, TimeTrade.

Once you have a clear sense of the value that your product or service offers, you might want to look at the competition to assess their offering. Ambrosino says that often products are under-priced compared to the value. Then look at the competition and decide if its a value-based pricing or cost-based pricing, he adds.

Market
Taking into consideration the market you are operating in would also help in deciding the prices of your offerings. If you are working in a market where the consumer has lower income, you surely cannot launch a luxury product or a service. "In my opinion the development of a pricing structure for a startup's products and/or services is one of the most critical decisions that can be made, says David Casebere, finance expert in Arizona. "Prices (which results in revenue) must cover all your costs and provide the cash that is needed to run the business. You can't make up the loss on the sale of any given item with volume unless it is a loss leader and you will make up the loss on that product with a high margin on another product that is tied to it, adds Casebere.

"Unless you are the first to market, or adding significant (and easy for the customer to see) value to the product--you will be competing on price alone, whether you want to or not." says Rob Auer, operations project manager at PowerSports Network.

Margin
This will effectively add to the price unless you decide to let go of it in the first few months of your startup. Doing that could make your offering price lower but in the long run may not be effective because raising the prices after, say about six months, could make it difficult to be sold off the shelves.

"As an assumption, margins on the cost would only be looked into after you make an initial impact (roughly around six months). That is when the product awareness will be created, provided there is a robust marketing strategy in place wherein you can consider taking a risk of increasing the price, says Ram Mohan Katla, a social entrepreneur.

Rajesh Narula, chief value creator at www.micromarketers.net believes that margins are decided by the strategy chosen. "A low-margin high-volume approach may be used for example, even when the startup's pricing is higher than competition, so as to generate "push" through the channel," he says. Conversely, a high-margin low-volume strategy may be decided when the production capacities of the startup are limited, which is often the case. Revenues could thus be built up for expansion into the mass market, he adds.

Experts believe that people don't necessarily buy on price alone. "Most buy based on functionality first. Thus when all competitors have the same functionality, then consumers move to reliability. When all have the same reliability, customers look for convenience. When all are the same at this point--then the product is a commodity and that is when price matters," says Joseph Lizio, CEO, Business Money Today. "Try a price point and see what happens. Talk to your customers and see what they say about it, given that they have or are going to buy your product. Based on that information, adjust up or down," says Lizio.

Pricing Below Competition?
Pricing your product or service lower than the competition could be a good strategy to penetrate the market but beyond that it would not sustain if the customers don't find much value in the offerings. "If you want to price lower than competitors to gain some market penetration, then do it through discounting and promotion of a list price that's similar or above the competition. Remember it's always easier to lower your prices, and much harder to convince your customers or prospects why you are raising your prices for a product," says Ambrosino.

Agrees Yang. "I do not think low price is a good way to compete in the market. But it's your unique product features and sale points. If you have an advantage in cost over your competitors, then low price is a good tool to use."

Vimarsh Bajpai

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