You should know what your product’s price range is expected to be. The lower end of the price range will be the price that just covers all costs needed to deliver the product to the customer, and the upper end of the range will be the higest price customers will pay. The correct "price point" for the product will usually be somewhere inside the range.
Choosing the correct price point for a product can be a very difficult task, but is important as setting the right price is critical to the profitability and success of a business venture.
Consult With Experts
Consulting with experts is one way to estimate customer demand for a product. The experts will often be individuals who have extensive experience selling similar products and who have had extensive interactions with customers in the target market. The closer the new product is to what is already out there, and which the expert has experience with, the more reliable and accurate the judgment of the expert is likely to be. Experts may miss the mark however on truly innovative products that are very different from what they are familiar with. An expert may be asked to provide price estimates and the corresponding sales volumes for three or more points (e.g. the lowest realistic price, the most likely price, and the highest realistic price in their opinion). Multiple experts may be polled with the results tabulated. The experts then examine the data, discuss the answers, explain their rationale, and hopefully arive at a consensus opinion. An advantage of using experts is that it is relatively fast and inexpensive. However, sometimes "experts" are out of touch with the market and reach wrong conclusions premised on flawed assumptions, information, or analysis.
Perform Customer Surveys
Getting the opinions of potential customers can provide more accurate and reliable data about what customers will pay for a product than consulting with experts. Opinions of customers are usually gathered by professional market research firms that design and conduct focus groups, surveys, or other methods that collect data concerning customer behavior and opinions. Customer surveys can take many forms (mail, telephone, internet), however getting good data from them can be a difficult and expensive task. One type of survey called a trade-off (or conjoint) analysis is known for its effectiveness. This method provides survey participants with a series of two choices where they must choose between them. Inherent in each choice is a trade-off that allows the researcher to determine how much customers value particular product features. The results of a trade-off analysis often differ significantly from the results of other survey techniques. For example, while respondents to a mail survey may say that having an environmentally friendly product is important to them, a trade off analysis may reveal that they are not willing to pay for it if it means losing other product features.
Experiment With Prices
Experimenting with price involves selling the product at certain price for a certain period of time, changing the price, and then observing the change in demand. A series of price changes are done, each time observing the effect on demand. The main drawback of price experimentation is that it requires an existing product. Thus to engage in this type of research requires an upfront investment in product development and manufacturing, albeit possibly on a small "test scale". For a new product this can be a prohibitively expensive and risky approach.
Analyze Historical Data
If there is historical price and sales data available on a comparable product, perhaps learned from an investigation of the competition, this may be analyzed to estimate customer demand. If such data is available, then it is a relatively inexpensive approach. However, such data may not be readily available, and differences between the contemplated product, and the product the data is based on may affect accuracy.
When considering what price you will charge, it is also important to take into account your competitive position: This means deciding whether the price for your product should be less than, the same as, or greater than the competition. As a general rule, try to avoid letting doubt or a lack of confidence result in an underpricing of the product. You should also set your price high enough to allow for downward movement. This may be necessary if the competition responds to your product by lowering the price of their’s.
Armed with price information, and information on the required margins of the sales channels, you can determine what the maximum cost to manufacture the product must be in order to satisfy the required margins of the sales channel and still hit the desired price point for sale to the customer. The product should be designed so that it can be manufactured at a cost no greater than, and preferably significantly less than the maximum cost to manufacture. The more you can reduce your cost to manufacture below the maximum cost to manufacture, the more pricing flexibility and greater potential profit margins you will have. To help achieve this the design of the product should also take into account the expected volume of sales, and hence expected volume of production.