It’s interesting to see the many approaches that management and marketing folks take in valuing their products or creating pricing for them, particularly now when information is so readily available online.
At a very basic level, the only reason that something has value is because someone else wants it. Give that some thought. If you’re the only person that has the product and no one knows about it or wants it, then the product has no marketable value. That’s always been an interesting way of looking at products and markets for me.
So how do companies go about pricing their products? Any number of ways I would say.
- Some will take the financial approach – this is often the one that your typical accounting and business management folks take. They will evaluate their cost numbers for the product and then go through some exhaustive financail P&L and margin analysis, thus arriving at some sell price number. Generally, this will be based on many, many assumption about projected sales and whatnot, often leading to total catastrophe in the marketplace. I’m not sure just what products you can do this for.
- Some will do a competitive analysis – This approach at lease attempts to measure relative value with actual consumers in the marketplace. In many cases where the product has moved or is moving into a relatively well know or even commodity category, this can work well.
- Some base price on a value proposition – They take a look at how someone is working with item A and then try to place a relative value on the relative value of using Item B or some new item. This values the relative utility of the other product but can be extremely complex due to the many assumptions required plus the fact that Item B generally has a different utility value for different consumer based on use case.
So the real question is how do we value and price products in the marketplace? Are you one of those marketers that believe that you can create demand? Maybe so, but it’s a big job particularly with a new category. Taking product slices off of a larger market, like Apple manages to do is much easier.
Next to think about is differentiation…..