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Product/service pricing

setting the price for a service

     
11:18 am on Feb 27, 2003 (gmt 0)

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I'm currently in a dilema over setting the most appropriate price for the annual subscription of a new web application I'm developing. The service is aimed at med-large UK companies where there is currently no direct competition. Initial projections and costings mean that I could charge as little as 185 a year and still turn in a reasonable profit as overheads are low. However, should I be looking more at setting the highest possible price to begin with, say 850? My thinking is that if a customer has a need for the service, they'd just as easily pay 850 as they woould 185? Plus, I doubt it would mean 4 times as less customers if the price is four times as high... Basic marketing stuff I guess, but this is an area I need to learn more about!
12:53 pm on Feb 27, 2003 (gmt 0)

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>>> there is currently no direct competition

How sure are you about that part?

If you really have no competition, you should still be very careful before charging a huge premium. Stop to think over why you don't have competition for your service. The questions you need to ask yourself is -

Is there a big demand or a requirement for the service in the market? Is your service absolutely crucial for certain industries? Do you have some sort of USP (Unique Selling Proposition) that your buyers would fall over eachother to sign up?

Research markets in other countries like the US and check the prices in that market. That should give you an idea about what you should charge.

I would suggest taking a middle ground when it comes to pricing and check the results for a few months. You can always increase/decrease the prices later on.

9:33 pm on Feb 27, 2003 (gmt 0)

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Phil, your guess is right. Much about price = psychology. The higher you price, the better: The less time looking for clients, the more the clients will "appreciate" and/or equate the product with quality at the get-go. The more they "invest" in it, psychologically - think of a Mercedes vs. a Hyundai.

Prices CAN always be lowered temporarily, though that's dangerous - "1/2 off this month alone" - indicates to the customer that the service is probably overpriced to begin with, or you're desperate to sell it, and willing to lose money on it. Unless you have a liquidation sale, "desperate" isn't something people like to equate themselves with. (We're talking about a 1 product offering: rules don't apply so much to multi-product marketing environments so much, as a "loss leader" will bring people in to buy...)

And if no one buys it at all (laughter ensues when you mention the price? clients faint?), then you can drop the price accordingly --- but once you set a price, RAISING it is nigh impossible, at least at a rate much beyond 5% - 7% per year. Look at all the bad press Microsoft recently generated by changing their pricing scheme, effectively raising prices drastically... suddenly Linux has become a very credible threat to that part of their business.

10:06 pm on Feb 27, 2003 (gmt 0)

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Thanks guys. Informative replies.

There is no direct competition that I know of through my research so far, but I guess there must be someone doing something similar somewhere. If they are, then it's not being pushed enough. To begin with, the service will be aimed at the UK market, if sucessful, I will expand, but I need to keep it simple from the beginning.

Additionally, I feel that a higher price will allow scope for commission based sales, rather than relying on on/off-line advertising alone.

2:10 am on Feb 28, 2003 (gmt 0)

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I had the same dilemma exactly - very unique product, no competition, niche market. I started at $500, with a $200 "show discount", then quickly raised it to $500 with a $100 show discount. Now I'm at a $50 discount only at the show, the day of the show otherwise it's 500. I could go higher as market share and demand increases.

I also charge by the tri-annual period rather than annually. So it's 500 for three years, then 250 for the next three years, etc.

So far only a tiny percentage object to the price, which makes me think I still have room to go.

pricing is all relative to the market.

2:37 am on Feb 28, 2003 (gmt 0)

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>>> I also charge by the tri-annual period rather than annually

What are the pros and cons of taking the opposite road - charging quarterly (or even monthly)? IS it a good option for not-so-competitive business environments?

2:42 am on Feb 28, 2003 (gmt 0)

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Seriously, my first consideration is whether it's going to be enough money to keep ME interested. Set a price too low and it will be the kiss-o-death for your entrepreneurial spirit and you'll wince every time you have to force yourself to be involved. I try to make a good assessment of what my reaction will be when the sales become routine.
2:51 am on Feb 28, 2003 (gmt 0)

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>pros and cons of taking the opposite road - charging quarterly (or even monthly)?

From firsthand experience, annual billing was a disaster. The main problem was that the clients often forgot about the service OR (very common) the contact person changed during the year and renewal time was an endless stream of emails trying to explain what the bill was about and who had originally signed up and why. About 2 years ago, we began converting to monthly billing, this past year everyone was monthly. Many clients want to prepay and we allow and even encourage that with a discount, but my orders are to ping the clients by sending them a memo billing at least quarterly.