Pricing is a critical factor in the success of a product. The right pricing strategy can drive sales, maximize profitability, and help you achieve your business goals. While you may be focused on maximizing your market share and profit margins, several factors come into play when you decide what should be the right price for your upcoming product.  

Since a business’s prime objective is to make money, your minimum reservation price as a business might be the cost of producing the product including manufacturing, labor, materials, and overheads. Cost cost-based pricing approach has been the most common method of pricing products, however, product success requires us to factor in market dynamics too.  It is important to remember that price by itself is also a product differentiator and there are pitfalls of under-pricing or over-pricing. Pricing should essentially meet your other components of the product marketing mix. 

When you decide to launch a product for your target customer, you consider the demand curve of the product and arrive at a price range to create the minimum support for your planned production or sales target. This price would usually consider the customer, the competition, the company, and other market aspects such as seasons and price wars. Based on the price elasticity of demand, you would ideally fine-tune your pricing to meet your sales target. This in the luxury segment could mean increasing prices to increase demand.  

If the product category exists, the customer already has a reference point. Pricing your product using competitive benchmarking correctly communicates your product and brand value.  If your product is an innovation and has no competition in the market, you would be targeting early adopters to create a future market for your product. This could be very tricky. On one side you may be tempted to floor the price to create demand, even if it means negative contribution margins and on the other side, you would be concerned about the reference point and perceived value you end up communicating to your target customer. It is important to gauge the customers' willingness to pay and adjust the pricing using promotion strategies. One must never forget that maximizing volume does not mean maximum profits and the customer does not have to own the product to know the value it brings with it. 

Estimating the demand curve is one of the most difficult aspect of the problem. Market data is the most straight forward way of creating the demand curve. We could use the data available from the sale of similar products. We could also run experiments to estimate the demand curve. With online channels available, the experiments can quickly generate response. Intermittent promotions and discounts, different prices for the same product based on the day of the week or store location can help us quickly build the demand curve. We can also use expert and customer surveys.

A customer buys your product only when it considers its perceived value to be greater than the price. When you bring the competition into the picture, the customer would buy the product that offers him the highest consumer surplus calculated as the difference between the perceived value and the price. The perceived value of the product includes the brand value too. 

Statistical techniques such as conjoint analysis are deployed to create pricing models that consider the value of product features and the competing brands to arrive at the price the customer’s reservation price.  Such statistical techniques are powerful tools for understanding customer value perception. They also help us tweak the product features to match customers’ value perception.

Differential or discriminatory pricing based on the customer’s convenience, need or loyalty is another way of maximizing sales. Starbucks may have three different sizes of coffee but it practically serves the same amount of coffee in each of those cups. Similarly 7/11 charges premium for the same milk that is sold cheaper by Walmart. Airlines run loyalty programs and offer discounts to promote repeat usage.

Pricing should promote product sales and maximize profitability.  Under-pricing harms your product profitability in the short run and brand value in the long run. Over-pricing simply kills the demand. It is  important that you take the scietific approach and spend the required time and resources  to price for the success of your product.