Price is such an essential part of product management and marketing that I devote an entire chapter to the topic in my book Business Fits. Does a high price insure quality? Definitely not. Does a low price indicate poor quality? Definitely not.
Many entrepreneurs start a business with the intention of competing on price, which is usually a formula for failure. A larger, more established competitor is in a better position for a price war.
I was involved in a price war once when I was in the recreational vehicle manufacturing business. We basically bought the business in an eight state area. There was no way a smaller competitor with less financial reserves and a smaller geographic market could compete.
I know of several products that are poor quality, but have the perception of quality due to an extensive advertising campaign. Companies often make a conscious decision to spend money on promotions and advertising instead of product quality.
Engineering is so good today that many products are only made to last as long as the warranty period. Keith Elwick was the founder of Hawk Bilt. He once told me that they originally made their products to last, but then the engineers got too good.
I give an example in my book of a product that did not sell because the price was too low. When the price was raised, it sold very well and continues to sell today.
Some products need a high price to denote quality and exclusivity. The cosmetics industry is a great example of this. Cost of production is minimal. The biggest portion of production cost is the packaging.
When I was a Ford-Mercury dealer, I noticed that many parts for a Ford, Mercury, or Lincoln, were identical, but had different part numbers and prices. The
owner expected to pay more than the
Mercury owner, and the Mercury owner expected to pay more than the Ford
owner. Ford Motor Company was kind
enough to accommodate them. Lincoln
Most pricing is called odd pricing or psychological pricing. The idea is that $19.99 sounds less then $20.00. This practice is very common and is especially successful with lower priced items.
When I was in the collector car business I did not use odd pricing on cars. If I priced a collector car at $49,950, the customer only heard $49,000 and expected to negotiate from there. I priced the car at $50,000 and told the customer we did not negotiate. The car now had a much higher image of quality.
Shipping costs can affect the price of a product. If the product has to be shipped to the customer, the shipping cost is often included in the price. Shipping costs can turn off a potential customer. I give a great example involving grass-fed buffalo meat in my book.
For more about pricing, read Business Fits which is available on Amazon.
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