A lesson I learnt about pricing.

One of the companies I ran had annual fixed costs of rent, labour, etc. of £1M. They had manufactured 100,000 products the previous year for customers. So, the previous MD did the numbers and decided each product would have to include £10 each to cover annual fixed costs and then add on a bit more for component material costs and then a bit more for a profit margin.

However, the products they manufactured varied in quality and lifespan and the component materials bought in to create this range of options varied by a significant margin.

The products designed to suit the volume market had component material costs of around £3 per product.

The products designed to suit the top end of the market where quality and longevity were the selection criteria, component material costs were over £9 per product.

This meant that the total notional assigned cost of the volume product was £13 (£10 for fixed costs and £3 for component materials) and the top end product £19. So adding 10% for profit they were on the price list at £14.30 and £20.90.

After carrying out a large number of visits with previous, existing and target customers it became clear that the volume product was too expensive and the quality product was viewed suspiciously as it appeared too cheap - customers assumed it was not manufactured with the quality component materials the direct competition offered.

We decided to re-price. The volume product was offered at around the going market rate of £9.99 (deliberately under £10). The top end product was offered at around the going market rate of £29.99 (which the market expected). The business now enjoyed a margin of £6.99 per product on the volume product and £20.99 on the top end product.

The market responded very well to both products and they enjoyed significant volume growth. The volume product went up by 20,000 units, the top end product by 5,000 units.

The company enjoyed almost 7% profit improvement.

The sales force had no problem selling the volume product.

The way to get them to sell a 50% price increase on the quality product will be in my next blog!

If you want to chat through pricing options that might apply to your business, please get in touch. 07771 526 276.