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Price is the exchange value of your product in the market place. There are three methods to determine the price of a product:

1. The cost-based method consists in determining the unit cost of a product, and adding a markup to set the price. Simple enough, but it fails to connect the price with the perceived value of your product.
2. The competition-based method consists in setting your price according to the competition’s. Also simple, but it lets others decide how much a consumer is willing to pay for your product.
3. The consumer based method consists in setting your price according to what consumers are willing to pay for your product. The most accurate pricing method, but the most complicated.

Better pricing
“To improve a company's pricing capability, managers should begin by focusing on the process, not on the outcome. The first question to ask is not, ‘What should the price be?’ but rather, ‘Have we addressed all the considerations that will determine the correct price?’” writes Harvard Professor Robert J. Dolan[1], who suggests several steps to better pricing:

1. Assess value consumers place on your product - Customer value is the difference between what a customer gets and what he/she pays.
   
   • What a customer gets (Total customer value): represents the total value of the entire product, incorporating services, personnel, and image values that a buyer receives form your offer.
   • What a customer pays (Total customer cost): the total cost of the monetary, time, energy, psychological, and sometimes physical costs or risks associated with your offer, in which the customer invests by purchasing your product.
2. Look for variations in the way consumers value your product
   Different customers may buy the same product for different reasons, and the same customer may buy the same product for different reasons at different times. For instance, some customers might be very committed to your show and would not miss it for the world, and other might see it as just another entertainment option, and will only come if you offer them an advantageous price. You need to understand why people come to see your show, and define how these reasons influence their perception of value attached to your product.
3. Assess consumer price sensitivity
   Will you sell more products if you lower your price? Maybe, but not necessarily. You need to understand the relationship between variation in price and subsequent variation in quantity demanded.
4. Monitor prices at the transaction level
   The face value of a ticket might not mean much if the show is constantly discounted. You need to determine the actual price at which your consumers buy your product, taking into account all discounts rebates and other promotional offers.
5. Identify an optimal pricing structure
   Using all the information gathered in steps above, you will be able to define a price scale based on customer evaluations of your different product features.

[1] Robert J. Dolan – How Do You Know When the Price Is Right? Harvard Business Review Sep 1, 1995

 

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