How to Price your Product for a New Market
How to Price your Product for a New Market
Finding the right price, price setting, or “price discovery” as some of the fancy wall street folks like to call it...
If you have ever been faced with the challenge of pricing a product for a new market then like us, you will have likely come across countless resources going on about the best tactics, tricks, practices and psychological voodoo you should use to set your prices. You will probably have read at length about hacks like avoiding integer pricing (e.g. $3.99 vs. $4.00), continuous rotating discounts, bundling, the list goes on.
But we’ve found that price setting is not an exact science. Far from it. In reality it is part art, part science and part endurance sport.
If you were to ask one of your economist friends the question: what is the right price? they would almost certainly point you to the econ 101 supply and demand curve and hit you with a “well the right price is where supply meets demand, its the market clearing price”.
And you would probably (very rightly) ask yourself: but what the hell does that actually mean in the real world? I sell craft spirits, wheres is my supply and demand curve? and what is my ‘market clearing price’? How do I apply this mumbo jumbo?
Well fear not! After having done this price setting exercise for hundreds of products in a number of markets, we’ve decided to put together a brief guide for the process we use to help other aspiring brands set their prices.
Step 1. Determine how accessible the product should be
The first thing we do is place where on the accessible vs. premium scale the product in question lands. This scale exists in all consumer industries, so you can take on a relative basis and simply map out the extremes. For example if our product is a spirit you can imagine on the premium end you could have a very expensive aged and rare whiskey that retails for 4 or even 5 digit price tags, and on the accessible end you can imagine some bottom shelf moonshine that barely breaks 2 digits in price.
If you were to map out all of the products in your industry or product category, you would likely find that most of them hover around some average and the further you head from this mean price in either direction the fewer products you would find.
When determining where a product would land on this scale, it is important to consider a number of variables, like the cost and quality of the inputs, the product’s branding, the target volumes etc. But the single most important consideration here is the audience.
For instance, to go back to the spirit example, if the product was created with a bar in mind, then we would need to make sure that the price is something digestible by a bar. This is the golden rule of setting prices:
“don’t price your product, price your customer”
Step 2. Find the comparable products
Once we have mapped out where we land on the accessible vs. premium scale we are ready to find our comparable products. These are products that have established prices in the target market and are very similar to the one we are price setting, in terms of their quality, target audience (i.e. where they land on the accessible - premium scale).
Now we need to go out and find the prices for these comps. Its best to find both B2C and B2B prices for each of these so that we can evaluate each of them separately. The B2C prices are easier to find, we just give the product name a google search and see what its retailing for online in the target market (this could be on the brands shop, amazon, or any other 3rd party online retailer).
The B2B prices are trickier to find, because often distribution happens offline and its direct sales driven rather than a transparent e-commerce model. These distributers share PDF pricing catalogues and that they typically hold their prices very close to their chest.
Protip: If you cannot find any B2B prices online, or do not have access to distributor pricing catalogues, then you can use a simple trick to estimate the B2B price based on the B2C price. Take the B2C price and apply a 15-30% discount and you should arrive somewhere in the right neighbourhood for the B2B price.
Step 3. Establish the initial target price range
Next we take the lowest and highest prices amongst our comparables and voila we should have a have a nice range to start analysing the potential price. This comparable price analysis or “comps” is the exact same method used on wall street to assign a value to a business.
This range is meant to be treated as a loose target and we should have the flexibility to go a little higher or lower depending on the product’s cost base. The wider the range, the more flexibility we will have. But careful, too wide of a range can raise more questions than it answers (imagine you had a range of $15.00 - $50.00).
If the range is too wide then we will consider narrowing our comp set to form a tighter target. We try to aim for at least a $5.00 range to play within.
Step 4. Calculate the implied margins
Now the really fun part! time to crack open the spreadsheet or calculator to start playing with some numbers. Here we need to test out the prices and see what resulting margins we get and make sure that these work with our cost base.
It is important to remember that the range we derived from the previous step is just meant to serve as a starting point. If the margin does not work, we need to rethink our pricing range and potentially find a better, more representative set of comparables.
To calculate our sales margins, we need to subtract from our sales price the applicable taxes and duties and all of our distribution costs like payment processing, warehouse fees, last mile delivery and sales commissions. When using 3rd party logistics its important to get from them a cost breakdown for multiple scenarios.
For this calculation we could use MS Excel, Google Sheets, Numbers, any spreadsheet software will do. However to make it even simpler, we have also made an online calculator to help simplify this step of the process for spirits brands. You can access it here.
If your product is not a spirit and you would like some help let us know here and we will send you a free spreadsheet template you can get started with.
Now we are able to triangulate the “right” price for the product. Ideally its one that fits the target range and delivers a margin that is workable for the cost base and volume expectations. We are now ready to start testing out the prices with the customers in the new market!
Step 5. Test and update your prices
This is probably the most critical step of all. Now that the leg work is done, its time to put our prices in front of customers and validate that it works for the product’s target audience.
We update our online store, our pricing catalogue, ads and anywhere else we wish to publish our prices.
Protip: We find its always better to be transparent with your pricing. Some schools of thought advise to be less transparent as this allows you to tier your pricing depending on your customer, but we find it slows everything down and can create some animosity with your customers. We believe its best to be transparent, and be generous with discounts to your regulars.
If the customers don’t complain and they buy the product, then voila welcome to the land of milk and honey! But the challenge does not end there. It is important to routinely revisit these prices and repeat the steps to make sure that the prices still work.
If the pricing does not seem to be working, then we may need to revisit the set of comparables and speak to some customers to understand where we are off. Rinse and repeat until you find the right price.
It is important to note that this is simply the method we use to take on the challenge of price setting as we find it straight forward, repeatable and an accurate starting point. But as with most things, there’s more than one way to skin a cat.
Equally important is understanding the constant need to resurface the price setting question, particularly in times of high price inflation. The economy is a constant moving and unpredicatble beast, and prices for all things are in constant flux. You should strive to set up a system for your brand where its straight forward to revisit, revaluate and update your prices.
Price setting is an iterative process, and it may take a few tries to find the right price, thats the endurance sport side of it all. The beauty though like with any iterative process, you are in control if you distribute directly and are free to change your prices as often as necessary.