Lane on… Pricing Lessons from Apple III
October 29, 2012
Did Apple overprice the new, smaller iPad? The financial markets slammed Apple for their pricing decision on the new iPad Mini. In an interesting segment on the price decision, MSN Money analysts tracked Apple’s stock price as the announcement of the pricing was made and the stock tanked as viewers sold on the news that it would be priced at $130 above the competition. I can’t say whether they nailed it and the pundits are wrong or whether they misjudged demand, but based on the fact that they are having troubles making enough to go around, I would say their pricing model hasn’t damaged the brand yet.
In fact, studies have shown that pricing is an important factor people use in determining the worth of a product. Certainly in consumer product as well as the business-to-business market, buyers get important value queues from the price. People tend to think you get what you pay for and a higher-priced product is worth more. This is especially true for initial pricing on innovative products, which are generally what Apple sells.
If your price announcements aren’t tracked by MSNBC and you don’t have the wherewithal to run focus groups and studies involving thousands of participants, how can you avoid costly mistakes in pricing new products and services?
There are actually a lot of approaches. Here are three that just about anyone can try:
- Find a comparable item. For instance, if you repair telescopes for a living, find out what the microscope repair guy charges. This is fairly straight forward if there are comparable or near comparable products out there. And, with a little more effort and study, this can actually produce a very tight range of perceived values that approximate the value your customers place on your product or service. Expert mode for this approach is when you need to determine the value of something that, literally, has no peer. Then, another approach is needed.
- Index off of the cost. This approach is often used to determine a price floor, below which no one should be allowed to sell. It is the easiest approach to apply. Take the cost to produce the product and add a fixed margin. The problem with this approach is that it does not take into account the value the customer places on the product so it often underprices them. Conversely, it can over-price products in cases where competitors are aggressively pricing their products to take or maintain market share. This approach should only be used to establish price floors below which you will not go. For instance, when a figure is needed for a GSA schedule.
- Determine customers’ perception of the value. This approach is the most robust of the three presented here. It takes advantage of the customers’ perception of the value of the product. This approach enables segmented pricing where prices for various, non-overlapping segments of the market are charged different prices. Not surprisingly, this approach can be very involved as it requires determining customer value perceptions. I can still remember sitting on a loading dock doing this for one client. We did timings to determine the time (and therefore cost) savings of their product over that of a competitor, whose product was very complicated to install. The beauty of this approach, though, is that it can even yield ideas for changing the structure of a product or service to create product tiers or other approaches to capture all the value in a given product.
So which of these approaches are you using… and what others have you tried?
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