Expert's Panel

A collection of timely and important topics posed to our panel of experts.

If you are first in the market, how do you evaluate the market value of your product?

 (ep1062)
1. Did you ever notice that our industry operates on a 40 –60 percent gross margin basis? It truly does. So people that come out with a new product and say I can price this at ten times cost are foolish—it doesn't happen. While we have said it is not the best, there is a place here for cost based pricing.
2. I would disagree and say that you need to do market surveys where the benefits and value are explained to potential customers. You need to look at the options—they may ignore this productivity enhancement; they may opt for a competing technology, etc. After you have looked at the options and gathered the survey data you can make an analysis and determine what you think is the optimum price for profit, which is the balance between volume and margin. Then introduce the product at that price. At the end of six months if you are struggling for sales, you didn't price it low enough.
3. The only exception I would take to the first speaker is be careful of cost plus as being your prime guideline. Your consideration needs to be value first. But, it is true that this industry nearly always ends up at a 40-72 percent gross margin on the products. This does not include software—it will have higher gross margins.
4. There is an old marketing story having to do with hair color. Hair coloring in the drug store came out after World War II. Before that women went to the beauty parlor to have it colored and they paid a lot of money for it. Someone brought out hair color bottles that could be purchased by the public and it was really cheap. It was a total flop and didn't go anywhere. The company was sold and the new owners re-introduced it to the market at 4–5 times the initial price, but it was still one-half to two-thirds of the beauty shop price. It took off and it made a lot of money. When it was so cheap, the message was it wasn't worth it. The more expensive introduction said it is worth it. Perceived value is what is important.