Pricing your Products

I keep hearing people talk about pricing models are very complex and they are always hard to come up with. I think most confuse over bundling options over pricing models. In fact the pricing models are by far the simplest and quite well defined. There are three standard models.

1. Cost based pricing - Before pricing the product make sure your costs of manufacturing the product along with a notional economic profit is covered. Pricing below the cost + economic profits may be situational in a promotion for some but it's not sustainable and hence will get back to you in the long run. While doing cost calculations make sure to account for fixed costs and allocated overheads. In some industries where there is no competitions like state sponsored monopolies like utilities this may be the only means of coming to a negotiated pricing with the state.
2. Competition based pricing - Unless there is significant different in the cost structure or product differentiation try to be as close to the competition as possible. Most people may think I have to be pricing below the competition always. This is probably the biggest mistake to do. Define competition and your strategic role in the market. A cost strategy or a differentiation strategy will decide what your target market is going to be and how your product should be priced in that. Your company size may not permit you to go on high volume low cost strategy as your support department cannot scale for your sudden volume growth.
   
3. Value based Pricing - Ultimately, beauty is in the eyes of the beholder and hence your product price is purely how your customer sees it to be benefiting him and thus pay you accordingly as per his limits. Pricing for value is the hardest. The biggest problems are no one really knows how the customer is going to use the product in her environment. Ideal will be to analyze the customer benefit and charge her for a percentage of the gains as a price. But in steep competition this may not always work as competitor may quote a price so low that you may lose the account in trying to gain the maximum from the customer.
   

So my initial comments are all wrong. Pricing is all very complex. Actually not. Pricing is easy in principle. What is hard is assessing the customer, internal assessment of costs and competition's game plan. As long as you know how you can control the quality of the data input the garbage in and garbage out can be well managed. It's your company's market intelligence and strong accounting system that's key to creating great pricing decisions.