What is the Right Price?

What is the Right Price?

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Challenge

This entrepreneur asks where he can find help in setting prices for advertising space on digital displays and which procedures he should follow before deciding on the right prices.

Response

Setting the most appropriate price is important but not easy to do. It needs at least as much attention as any of the other ’4 Ps’ of marketing. Start-up entrepreneurs traditionally spend most of their effort on product development.

They put more time and thought into marketing promotions and sales channels than pricing. Price is important in almost every buying decision so it can be as crucial as the product features in securing the sale.

There are many different pricing strategies and methods; they are widely published in books and blogs so entrepreneurs can educate themselves. Most small businesses will use one of the following three basic pricing methods.

Cost plus

A mark-up to cover fixed costs and profit is added to the cost price. This method works best where sales volume is reasonably predictable and the item cost price can be accurately calculated. In areas like digital media where there’s a high fixed cost of the screens, and no certainty about what percentage of the possible adverts per screen will be sold, it becomes more difficult.

The same is true of all types of media, B&Bs, transport, entertainment and many other business types.

 

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The entrepreneur has to decide what percentage of the advertising he thinks will be sold and then calculate the price that would cover costs and show a profit. There may be a temptation to load early bookings with higher prices so the cost recovery comes about sooner, but this is risky.

Positioning

Setting prices as a positioning statement against prices charged by competitors is another pricing technique. Setting the same price would indicate that the offering is about the same – a higher price suggests a premium service.

Clearly the entrepreneur still needs to make a profit, so the price cannot just be set at any level. There are some dramatic examples of prices making a statement against competition – branded shoes, sunglasses, drinks or hotels may cost many times the price of similar items, although the product has similar functionality.

These prices signify exclusivity, quality and prestige. At the other end of the scale, low cost airline pricing suggests no frills, less leg room and limits on making changes to bookings.

If this pricing method is chosen the entrepreneur has to continually check competitors’ prices – and his own profitability and cash flow. In setting prices using competitors’ prices the entrepreneur needs to be aware of who the competitors really are; digital advertising competes with other digital media providers but also with print, radio, Internet advertising and email, social media and telesales.

Perceived value

Pricing for the value the customer believes he will enjoy is theoretically the perfect way to price, but it’s dangerous to guess what that perceived value is – rather ask some prospective customers what they would pay for a product or service if it were offered to them.

Formal market research is valuable although it’s expensive, but research will be a lot cheaper than business failure. Testing price levels in a pilot project and then surveying buyers can give good results. It’s easier to price a highly differentiated product or service this way.

Think of having the only digital advertising screens at Soccer City on the day of a Pirates / Chiefs match. Setting the price per advertising slot would bear no relation to costs or competitors’ pricing; it would be based on the extremely high perceived value to advertisers.

The right price is likely to be one that takes all three considerations into account. An absolute requirement is to be able to provide potential customers with accurate data about how many people will see the advert, viewer’s reaction, and exclusivity of the display position. Always test pricing with pilot projects, for instance making limited sales in niche areas to test price acceptance.

Ed Hatton
Ed Hatton is the owner of The Marketing Director and has consulted to and mentored SMBs in strategy, marketing and sales for almost 20 years. He co-authored an entrepreneurship textbook and is passionate about helping entrepreneurs to succeed.