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Feature
Article:How Important is price?
This issue is located on-line How much to charge for your product or service? The interminable question, with no easy answer. If you over price, you will probably end up with very few sales. If you under price, you're leaving money on the table. Today we continue our series on how to avoid the common pitfalls of running an online business. As reported in previous articles, a major international bank has been investigating the main reasons for small business failure. So far we have looked at three common mistakes: "poor choice of location", "cash flow problems", and "failure to move with the times". In each case I discussed the specific significance of the problem for online businesses. Today, I would like to discuss the fourth most common reason for business failure: under-pricing and over-pricing. What specific lessons can be learned for online businesses? Pricing Problems There are two generic pricing strategies that are often considered when entering a new market. The first is "price skimming"; the second "price penetration". I will argue that, contrary to popular belief, neither of these generic strategies are necessarily appropriate for online small businesses. Price skimming refers to pricing your product at the high end of the market. If your product or service is new, and there are few competitors, then you may be able to enter the market with a high price. You may be able to enjoy a period of super-normal profits before new competitors enter the market and begin to drive the price down. Price skimming will only work if your product is unique, with no direct competitors or substitutes in existence. However, few online businesses have succeeded with a price skimming strategy. One reason is that competition on the internet for most product categories is already pretty high. With millions of websites already established, it is rare that an online business has *no* competitors. Moreover, the low cost of setting up a business online means that starting with a high price rapidly attracts new competition. Price penetration strategy involves setting the price very low, in an attempt to steal away market share from the competition. Profit margins may be lower, but the hope is that increased volume will result in sufficient profits. Both of these text-book pricing strategies assume that the business is easily able to communicate their prices to the market. However, for online businesses, the first problem is getting noticed. It does not matter if you have the lowest prices in the market if no one knows where to find you. Using a price penetration strategy would be useless since you would not be able to attract the sales volume necessary to generate sufficient profits. And, it does not matter if your prices are twice that of your competitors if it is practically impossible for customers to find your competition. The first rule of pricing on the Internet therefore has to be "price what the market will bear". Do some research to find out just how much competition there is in your particular market. How many competitors do you have? What are their prices? The internet also offers the unique ability to actually test your market. I know of some people that have set up two or three different websites offering the same product at two or three different prices. This way, they are able to test the market, and figure out which price point maximizes revenue. However, it probably makes most sense for small businesses in competitive markets to set prices to be in line with what others are charging. Even more important than the pricing decision is website promotion. Time and energy spent worrying about pricing strategy will be better spent promoting your website. If you can build traffic to your site, and keep them coming back, then you will have more flexibility with your pricing policy. Remember, if you can't attract the traffic, it doesn't matter how much of a bargain your products are when nobody knows you exist!
Paul Needham
LinkMedia Communications Inc. ---------------------------------------
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