The evaluator must be aware that product pricing will have a tremendous influence on the nature of both present and future competition in the marketplace.  Product pricing tends to create quick and drastic actions and reactions from present competitors, especially those ready, willing, and able to move quickly to alter their own price structures.

Pricing structure and policy is generally dictated by:

• The nature of the buyer
• The features, advantages, and benefits of the product
• The nature and condition of the overall market
• The proposed channels of distribution
• The number and cost of point-of-purchase displays which will be required.

For instance, pricing a product in a very price intensive (price driven) and competitive market will be much different than selecting a pricing structure for a product in a non-competitive market where there are no substitutes for the product.

In the competitive market, the innovator will be forced to closely examine the competitor’s pricing structures and attempt to anticipate what the competitor’s reactions will be before setting a price for the product.

The one mistake you must avoid at all costs, even in a price driven market is to price your product so low that it discredits the intrinsic value of the product.  This mistake is sometimes made by manufacturers who are selling their well known and well advertised brand name product through one channel of distribution, and then attempt to sell a “private labeled” brand of the same product through a different channel of distribution at a price which is so low that the consumers perceive that a product of this type should cost more and therefore they believe the private label product must not be any good.

In a non-competitive market, the innovator will try to set the price as high as the end users perceived value will allow.

For this reason, the product evaluator should always conduct an initial focus group of prospective buyers and sellers of the product before locking in an initial price and then conduct a follow through focus group again before altering the price during the product life cycle.

In the focus groups, the innovator will not ask the group “how much would you pay for this product” because that question will net only subjective answers which will vary wildly with the individual.  The question should always be:

“HOW MUCH WOULD YOU EXPECT TO SEE THIS PRODUCT COST IN THE PLACE WHERE YOU WOULD GO TO BUY IT?”  For buyers, and:

“HOW MUCH WOULD YOU EXPECT TO SEE THIS PRODUCT COST IN BUSINESSES SIMILAR TO YOURS?  For retail sellers and distributors.

Asking the question in this fashion will eliminate a great deal of the subjectivity, and will net you much more accurate “real-world” pricing figures.

Once you have determined the buyers’ and sellers’ ideas of perceived value, you must then look at all of the other factors before determining a final price.

Factors for determining pricing structure are:

1. The buyer’s perceived value of the product.
2.  The seller’s perceived value of the product.
3.  The perceived level of appropriate compensation for all middlemen, “reps”, retailers, etc
4.  The cost-of-goods-sold of the product ( the cost of manufacturing, promoting, and distributing the product).  Note:  Be sure to use the lowest production quantities you will ever run, even at start-up, to calculate your cost-of-goods-sold, or you may end up with low or no profit margin.  Be sure to include the cost of point-of-purchase displays.
5.  The overall condition of the marketplace and market segment you will be selling in.
6.  The competition’s present pricing structure, and your best guess at how your competitors will price their products once you enter the market.
7.  The profit or rate of return you (and your investors) desire.
8.  The expected life cycle of the product. (How long you will be able to sell the product.  For instance, fad items have a very short life cycle.)
9.  The prices of other products in your line, if any. (It is generally not a wise move for a small manufacturer to have a low-priced product line having only one very high-priced product in it).
10.  Costly compliance fees and standards required by government regulations and agencies that govern the manufacturing and sales of your product, including taxes.
11.  The cost of liability insurance if your product has any chance of harming anyone.