McCombs School of Business
Knowledge

Testing the Market
How Much Will They Pay?

When hoping to provide a product to the masses while covering incurred costs, it is obviously necessary to charge a price, but how much? What is that perfect amount, taking into account supply and demand, which will keep both the inventor and customer happy? Pricing is determined most by what potential customers will pay, irrespective of what method you use - and perceived value can differ greatly from actual value (Asia Africa Intelligence Wire). The key to product pricing lies in knowing the customer's needs, as well as their demographics. It should be centered on the marketplace and what is essentially feasible for consumers. How much money do they make, what is their money already spent on?

If in doubt about pricing, it is wise for inventors to start with a higher price and reduce it later, as it is more difficult to increase your price. If unsure, introduce the product or service at a special introductory price for a limited time (Asia Africa Intelligence Wire).

To know the magic price before actually being in the market is impossible, but there are several methods that can be used to assess the potential price. The most common methods for determining price are the cost-plus model and the competitor model (Asia Africa Intelligence Wire).

Cost-Plus Model - With this method, all costs to make the product are added up and a percentage mark up is included for profit to reach a good final price.

Take costs and figure out how many products at a certain price will cover them. The point where sales cover costs is called the break-even point. It is calculated by:

     Number Units Sold (Unit Price - Variable Unit Costs) - Fixed Costs = 0

This is a good point to start from. With the Cost-Plus Model, a price can be set to at least cover costs, and increasing from the base price can attain a desired profit.

Competitor Model - The name says it all for this model. By discovering what competitors are charging successfully for similar products, it becomes easy to see what the market considers an acceptable price. However, don't blindly apply the formula. Some competitors may be about to go out of business because they can't sustain enough orders to maintain low margins, and inventors don't want to repeat their mistake (Asia Africa Intelligence Wire).

Another way to set the price is to learn what people will pay for the product or service. A good way to go about this is to survey potential customers.

Pricing is a difficult part of testing the market, but a very important one. Inventors should spend a good amount of time gauging the market for pricing purposes. Do your homework, set a price, be creative with your offer and monitor the response. That way, you can change your price to suit the market, but most of the guesswork will be eliminated (Asia Africa Intelligence Wire).


Paper outline

Check out the Silent Timer Web site to see the product Erik took to market. Contact him with any questions.

 

 
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