Pricing strategies for a new physical product – Different methods explained

Hey, Mats here! I’m currently in the process of launching Bonter, an aesthetic indoor composter that’s designed to be super user-friendly. Since the market for indoor composters is relatively small—let’s face it, most people aren’t yet accustomed to the idea of composting indoors—I had to dive deep into research, particularly around understanding my target audience and pricing strategies.

I could easily create a very expensive, futuristic composter, but if the market isn’t ready for it, my business could go under within the first year. It’s crucial to know the exact price potential customers are willing to pay, especially when considering production costs like materials. One of the key studies I conducted was using the Gabor-Granger model. Participants were introduced to Bonter and the concept of vermicomposting (yes, worms are involved), and were then asked, “Would you buy Bonter One for €X?”, with prices ranging from €120 to €280.

The results were fascinating. Almost half of the participants leaned towards the lower price range of €140-160, while a significant portion showed willingness to pay €240. This insight was incredibly valuable as I had initially planned to launch a high-end model first, followed by a more affordable version for a broader audience. The research provided a solid foundation to continue product development with these two price points in mind.

This is a personal example, but I hope you can relate. It’s precisely this experience that inspired me to write this blog post. Pricing a product isn’t just about picking a number—it’s about making informed, strategic decisions that align with your business goals and market positioning.

Cost-Based Pricing

Cost-based pricing is like the old reliable in your pricing strategies toolbox: it’s simple, straightforward, and won’t leave you scratching your head late at night. This method involves adding up all the costs associated with producing your product—think materials, labor, and overhead—and then tacking on a markup to ensure you make a profit. It’s the go-to strategy for industries where cost structures are well-defined, like manufacturing or construction.

However, while this method might seem like a no-brainer, it’s not without its flaws. For instance, it doesn’t take into account what your customers are actually willing to pay or what your competitors are charging. Sure, you’ll cover your costs, but are you leaving money on the table? Or worse, are you pricing yourself out of the market?

Let’s take the iPhone, for example. If Apple used a strict cost-based pricing strategy, they’d be focusing on the production costs and adding a fixed margin. But Apple doesn’t just sell a phone—they sell an experience, a status symbol, and an ecosystem. If they only factored in production costs, they’d miss out on the premium pricing that customers are willing to pay for the Apple brand. So, while cost-based pricing is useful, it’s crucial to balance it with an understanding of your market and customer expectations.

As Robert Schindler discusses in Pricing Strategies, while predictable, cost-based pricing should be used with caution—it’s like using a hammer for every job when sometimes you need a screwdriver.

Value-Based Pricing – Charge What You’re Worth

Now, imagine setting your product’s price based not on what it costs to make, but on the value it provides to your customers. That’s the essence of value-based pricing. This method is particularly powerful in markets where your product offers something truly unique—something your customers can’t get anywhere else, or something they believe is worth more than just the sum of its parts.

Take Tesla’s Model X, for example. Sure, you’re paying for the electric motors, the fancy doors, and the plush interior, but you’re also paying for what the car represents: innovation, sustainability, and a forward-thinking lifestyle. Tesla doesn’t price the Model X based on what it costs to produce; they price it based on the value customers perceive—being part of the Tesla revolution.

The beauty of value-based pricing is that it allows you to capture more of the value you’re creating for your customers. If your product solves a big problem, offers significant benefits, or just makes people’s lives better, they’re often willing to pay more for it. But be warned—this approach requires deep insights into your customers’ needs and desires, as Harry Macdivitt points out in Value-Based Pricing. It’s not just about slapping a high price tag on your product and hoping for the best; it’s about genuinely understanding what your product is worth to the people who buy it.

Competitive Pricing

Competitive pricing is where you look at what everyone else is charging and say, “Hey, I can do that too.” It’s a strategy that’s particularly common in markets where products are similar and customers make decisions based primarily on price. Think of it as the fast-food approach to pricing: if McDonald’s drops the price of a Big Mac, you can bet Burger King is going to adjust their Whopper pricing pretty quickly.

This method is straightforward—you set your price based on what your competitors are charging, ensuring that you remain competitive in the market. However, it’s not always the best approach if you’re trying to build a unique brand or differentiate your product. In fact, it can lead to a race to the bottom, where everyone is slashing prices just to stay afloat. And let’s be honest, unless you’re the Walmart of your industry, a price war is the last thing you want.

Take Coca-Cola, for instance. While they certainly keep an eye on Pepsi’s pricing, they don’t solely compete on price. Instead, Coca-Cola focuses on brand loyalty, customer experience, and global presence to maintain its market share, even if it means being priced slightly higher. They understand that competing on price alone isn’t always the winning strategy.

So, while competitive pricing can keep you in the game, don’t forget to play to your strengths—whether that’s your brand, quality, or customer service.

Adapting on the Fly with Dynamic Pricing

Dynamic pricing is like playing the stock market with your product prices—always changing, always adapting to the latest conditions. This strategy involves adjusting prices based on real-time demand, supply, and other market factors. It’s popular in industries like travel and e-commerce, where prices need to be flexible to maximize revenue. Just think of how airline ticket prices fluctuate depending on when you book your flight.

This method can be incredibly effective for boosting profits. For example, Amazon changes its prices millions of times a day to match supply and demand, competitor pricing, and other factors. This flexibility allows them to stay ahead of the competition and optimize their sales at any given moment. But dynamic pricing isn’t just for the big players—small businesses can use it too, especially if they have products with varying demand throughout the year.

However, it’s not without its challenges. Oren Ben-Zvi points out that while dynamic pricing can optimize profits, it requires sophisticated monitoring systems and can be complex to manage. Plus, if customers notice prices fluctuating too much, they might start feeling like they’re playing roulette every time they shop, which could erode trust.

So, if you’re considering dynamic pricing, make sure you have the technology and strategy to back it up. It’s not just about changing prices on a whim—it’s about making data-driven decisions to get the best possible outcome.

Psychological Pricing

Psychological pricing is all about getting into your customers’ heads and influencing how they perceive value. This strategy leverages the quirks of human psychology—like pricing something at $9.99 instead of $10.00 to make it seem significantly cheaper, even though the difference is just a penny. It’s the reason why your local store prices things at $19.99 instead of $20.

William Poundstone, in Priceless, explores how these subtle pricing tricks can have a big impact on consumer behavior. It’s not just about the number itself; it’s about how the number makes customers feel. A product priced at $9.99 feels like a better deal than one priced at $10.00, even if the actual difference is negligible.

Take a look at the pricing strategies used by fast-food chains. They know that setting a meal price at $4.99 will appeal more to budget-conscious customers than a $5.00 meal, even though the actual price difference is insignificant. It’s a small tweak, but it can lead to a big difference in sales.

However, psychological pricing isn’t a one-size-fits-all approach. It’s most effective in retail and consumer goods markets where price sensitivity is high, and customers are making quick purchasing decisions. If you’re selling a high-end product, customers might see through the $0.99 trick and view it as cheap or deceptive.

So, while psychological pricing can give you a boost in sales, it’s important to know your audience and what works best for them. Use it wisely, and it can be a powerful tool in your pricing strategy arsenal.

Testing the Waters with the Gabor-Granger Method

The Gabor-Granger method is a bit more scientific—it’s like running a controlled experiment to find out exactly what your customers are willing to pay. This method involves showing customers different price points and asking them if they would buy your product at each price. The goal is to determine the optimal price point that maximizes revenue without scaring away potential buyers.

In my experience with Bonter, this method was invaluable. By asking participants whether they would buy Bonter One at prices ranging from €120 to €280, I could see not only which price points were most attractive but also how sensitive customers were to changes in price. This kind of data-driven insight is gold when you’re launching a new product.

This method is particularly useful for new products or markets where you don’t have a lot of pricing data to go on. It can give you a clear picture of what your target audience is willing to pay, helping you avoid the pitfalls of pricing too high or too low.

But beware—this method requires a solid sample size and careful analysis to get reliable results. It’s not as simple as throwing a few price points at your customers and calling it a day. You need to carefully design your survey and analyze the data to make sure you’re getting an accurate read on your market.

The Van Westendorp Price Sensitivity Model

If you’re looking for a more nuanced approach to understanding how your customers perceive price, the Van Westendorp Price Sensitivity Model might be your go-to. This model asks customers four critical questions to determine their price expectations: What price is too cheap? What price is too expensive? At what price is the product getting expensive, but still worth it? And at what price is it a bargain?

Paul Hague, in Market Research in Practice, highlights how this method can help you pinpoint the optimal price range where your customers feel comfortable buying. It’s like finding the sweet spot that balances affordability with perceived value.

This method is particularly valuable in markets where perception plays a crucial role, such as luxury goods or premium services. For example, if you’re launching a high-end skincare product, you need to know not just what customers are willing to pay, but how they perceive different price points. A price that’s too low might make your product seem less effective or less luxurious, while a price that’s too high could push it out of reach for many potential buyers.

However, the Van Westendorp model doesn’t account for competitive pricing or market dynamics, so it’s important to use it as part of a broader pricing strategy. It’s a great tool for understanding your customers’ perceptions, but you’ll also need to consider other factors like cost, competition, and overall market conditions.

Conjoint Analysis – Balancing features and price

Conjoint analysis takes pricing research to the next level by analyzing how customers value different features of your product—including price—relative to each other. It’s a powerful tool for understanding what combination of features and price points will drive the most sales.

For instance, let’s say you’re launching a new smartphone. Conjoint analysis could help you figure out how much customers value different features like battery life, camera quality, and screen size, and how these features interact with price. John H. Roberts explains how this method allows you to identify the optimal product configuration that meets customer needs at a price they’re willing to pay.

This approach is particularly useful for complex products with multiple features, such as electronics, cars, or software. It provides deep insights into what customers really want and what they’re willing to sacrifice in exchange for a lower price.

However, conjoint analysis is not for the faint of heart—it’s complex and can be costly to implement. You’ll need a solid understanding of statistical analysis and access to a representative sample of your target market to get meaningful results. But if you’re launching a product where every feature counts, it can be an invaluable tool for getting your pricing just right.

Critical factors to nail your pricing strategy

No matter which pricing strategy you choose, there are a few key considerations that should guide your decision-making process.

Market research: Thorough market research is essential for understanding your target audience, competitors, and customer preferences. It’s not enough to just guess at what your customers might pay—you need to back it up with data. As Thomas Nagle points out, a well-informed pricing decision can be the difference between a successful product and a market failure. Don’t be afraid to dig deep and get the insights you need to make smart pricing decisions.

Flexibility: The market is constantly changing, and your pricing strategy needs to be adaptable. Be prepared to adjust your prices based on customer feedback, changes in costs, and shifts in market conditions. Flexibility can help you stay competitive and profitable in the long run. After all, sticking rigidly to a single price point in a dynamic market is like trying to drive a Tesla on a dirt road—it’s just not going to work out well.

Long-Term strategy: Pricing isn’t just about making a quick buck—it’s about positioning your product for long-term success. Consider how your pricing strategy fits into your overall brand and product portfolio strategy. A well-aligned pricing strategy can reinforce your brand’s value proposition and support your business goals. Think about Apple again—they don’t just price products to sell today; they price them to build and maintain a premium brand over time.

Optimize your pricing for success

Pricing your new physical product is more than just picking a number; it’s about choosing a strategy that aligns with your market, your customers, and your business objectives. Whether you opt for cost-based, value-based, dynamic, or another pricing method, each has its strengths and weaknesses that should be carefully considered.

Ready to review or develop your pricing strategy? Let’s discuss how you can maximize your product’s market entry success. Contact us for a free consultation, and let’s craft a pricing strategy that works for you.

A well-thought-out pricing strategy is a cornerstone of a successful product launch. Don’t leave it to chance—make sure your pricing is as strategic as your product development.