Thursday, August 25, 2005

How to price a new product

One question I often hear is "how do I price my new product?" Assuming a goal of maximizing profit, how can you determine the optimal price to set? This is always an interesting question, and not an easy one to answer.

For B2B products, there are some guidelines that I would follow.

1) Determine what does it cost you to make your product. Many people use this as the basis for determining their price (take this cost and add some percentage to give you a profit margin). This works in that it could give you a profitable product, but this is probably not the optimal profit-giving price. Instead, I recommend that you mostly use your cost just to determine if the price you are selling at is one that justifies making the product. This is the lowest price that you should accept and still be able to have a viable business.

2) Also determine what is the benefit of using your product to the customer. What does it cost them to do what they are doing now to get their need solved, versus what it would cost them with your product. The difference is the benefit to them.
You will likely have to estimate this, as getting accurate data is a challenge. This is the highest price that a customer may pay before the economics say they shouldn't buy your product.

3) the price you set should be somewhere between your cost and their benefit. Choosing the price between these is definitely more of an art than science. On the whole, you want to choose a price as compared to them not using a product like yours that allows them to have a return on their investment of a year or less (e.g. if price for your product is $50,000, make sure they get at least that much benefit within a year from using your product).

Competitive product's prices also play here - if a competitor makes a product that does the same thing as yours, this often should be used as a baseline for your pricing. You would then adjust your price, depending on whether you are trying to be the cost leader (adjust your price down), quality leader (adjust your price up), if there are features which the customer wants that you have which the competitor doesn't (adjust your price up), etc.

For B2C products, I think a much more supply-demand type look needs to be done. In most B2B, you usually have a smaller number of customers who spend more to buy the product, so you can calculate a benefit for the purchaser. But in B2C, there are usually so many purchasers through different channels (who set there own pricing based on your suggestions) that this doesn't work. Instead you probably want to do test pricing (adjusting a price and then seeing its impact on sales) until you find the one which gives you the best profitability.

Setting a price for your product can seem like a daunting task, but by thinking through a few things, you can come up with a pricing scheme that improves the profitability of your company.

Wednesday, August 24, 2005

What B2B marketing activities to do first

It is not uncommon to hear someone with a new company ask me what marketing they should do first. Sometimes the question shows up a bit backward - they heard that a certain activity (like branding their product, using direct mail, making a web site, etc.) should be done to start marketing their company. But no matter - they have a new product (or service) and have put things in place so it is now ready to be sold. But no one knows of their product – so they want to know how to get the word out and start bringing in sales?

It would be nice if you had the budget to launch your new product (or service) with full-page color advertisements, 30-second Superbowl spots, and any other media you wanted, but most start-ups are chronically short of money. So, what are the cost effective steps one could take?

I went to a lunch seminar today put on by the Business Marketing Association, and one of the speakers there said what I believe - that the first step for most B2B companies should be direct sales activities. They had done some research on the results of different programs, and found that direct sales had an ROI that was many times that of direct marketing, email marketing, etc.

Of course, there are variations based on specific companies. For example, for many consumer companies (B2C), the first step is usually getting in to distribution channels.

Of course, before you can start any marketing programs, you will want to produce some basic literature for your product, including a data sheet and/or brochure, pricing, web site, etc. You will likely also want to find one or more reference customers, who you can get testimonials and installation photos from. The testimonials will do wonders toward reassuring prospective customers that your product is viable. It is not uncommon to offer discounts to these reference customers in exchange for the testimonials and photos.

Just so you know that I am not saying all this to sell my service - direct sales is not really an area of my expertise. I am good with the relationship part of sales, but generally do not enjoy the prospecting part. This was an area where I didn't do well with the start-up I had. Messaging, marketing programs, etc. all went very well, but I couldn't get myself to keep making cold calls day after day, nor did I step up to the plate to pay someone to do it for me. In the end, it was an expensive way to find out a weakness of mine.

Monday, August 15, 2005

Start-up book recommendation

My work for consumer businesses recently has outpaced my B2B work. This is a bit of a surprise, given that the vast majority of my experience has been in the B2B world.

One client has been working in the bicycle industry for over 20 years, and has now decided to try his hand at running his own shop. He is incorporating the business (something I would recommend any retail business do in the US) and has made me one of the board members. He is still doing all the prep work (arranging financing, finding a location, signing on bicycle manufacturer's products to carry, etc.), and will hopefully open up in the next few weeks.

When he and I first talked about him starting a bike shop, one the first things I did was send him my copy of a book called The Small Business Start Up Kit, by Peri Pakroo. Actually, I sent him the California specific version which they also have. These books are published by Nolo, a service that tries to make legal advice and activities doable by normal people.

I used this book when I was starting my first start-up. I had the technology all figured out and such, but I didn't know how to handle the various government requirements (what forms to fill out, whether to incorporate, how to set it up so I could do business under another name - the "DBA", etc.). This book covers all of this, and more, in a way that is easy to understand (which was a bit of a surprise, given the author is a lawyer). Highly recommended for anyone thinking of starting their own business.

Interesting, this book came up again in conversation yesterday. A good friend is thinking about opening a B&B, so I have ordered a copy of the book which I will give to her.

For convenience, I have included links to for both the National version and the California specific version of this book.