I was asked the following question today about cost versus price: How would you answer

Kevin
From the XXX plus products you have handled and been involved in over the years, how many would you say were almost price point immune, I came across a hand tool here in Aussie that was selling well for $900- each, my guess is this is rare, selling well

I am interested in your comments on price point and new products, is it mostly dictated by other products in the market already? as a bench mark, this is what some buyers use as a indicator, can level of interest drive past this?

I also find distributors will get their own pricing from factories in China, to compare, basically work out margins in reverse in a sense,
Derik

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2 responses to “I was asked the following question today about cost versus price: How would you answer

  1. David L. Phillips (LinkedIn Connection) gave the following answer:

    I don’t think any product is immune to price point. Buyers have to weigh the value of a product to them. If the price exceeds the value of the product, there will be few buyers.

    Establishing the price of a product should not come from its cost, but rather from what the market will support. Does the product alleviate some pain that has a tangible cost for the buyer? Is the product the most cost effective way to solve a problem?

    If the expected market price, both initially, as well as later when competition develops, supports a healthy projected margin, then it’s a viable product.

    (David is a highly effective Financial leader and Owner of his own business Espresso Coffee Solutions. You can visit his LinkedIn site using the following link; http://www.linkedin.com/in/davidlphillips )

  2. My Answer:
    All were price point sensitive in some way. The simple answer is Research, Research, and Research.

    1. Research the product category; for instance something sold into medical can withstand a higher price point then consumer goods even if we are just dealing with packaging.
    2. Research the customer in test marketing price points.
    3. Research the value the product adds to the solution it is trying to achieve.
    I had over 600 RFQ’s (request for quote) pass my desk each year for 14 years when I worked in Product Development for Nomaco. We had 6 design engineers and 4 process engineers working the department. I was tasked with stage-gating (filtering) these request to determine the 20-30% of these that would see the light of day.
    But everyone of them had to be costed! This was a tremendous challenge, how do you not, leave money on the table???
    I developed a program called “EBIT plus”; Earnings Before Interest and Taxes plus a percentage for profit. EBIT costing requires you charge all costs into the product costing. EBIT cost would include all direct cost; such as salaries, raw materials, utilities, etc and indirect cost like rent, sales commissions, marketing, administrative etc. Then depending on the market being served we would add between 5-25%. For instance a product going into the construction business would end up at a 5% mark up and something for automotive at 20%.
     Now remember EBIT costing includes the cost of cutting the grass in front of the building!!!
     Also any royalties being paid out for a license!!!

    Now here comes another “but”. You must price your product for the value it brings to the buyer of that product. Simple to say; but hard to commit to. Apple is the most profitable company in the USA; we have never been given an Apple product. Many companies started giving away phones to get a service contract, where are they now (Nokia?).
    Sharp Branding and Good Marketing can drive a bad product to make us take money out of our pocket…does Microsoft ring any bells.
    Minus a good marketing research team; reverse costing is one way of pricing, but I don’t recommend it.

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