The Art of Pricing
I invented one of the coolest new products in my industry (gardening) in the last fifty years and I didn’t know how much to charge for it. I knew after all my years in business that the one thing that probably has the biggest effect on sales is pricing. And most people have no clue how to set a price which can be equal parts, psychology, research, analytics, and trial and error.
An enterprising attorney I had met some time ago at the Licensing Expo in Las Vegas, set up a meeting with Vince Offer — the ShamWow pitchman legend who had become somewhat of a cult star with the millennials. He was interested in featuring my newly released product, the VeggiePOPS seed starters (now called SeedPops), on one of his infomercials. We met in nearby Santa Monica for coffee where he divulged that his name was really Offer Shlomi, and that he changed his name to Vince because he was a huge fan of Vinnie Barbarino, John Travolta’s character on the iconic 70’s television show, Welcome Back Kotter. What a coincidence, I thought, because John is the Godfather to my daughter, Cassie, but that’s another story. Vince was a fascinating guy who innately knew more about pricing than just about anyone I had met in my thirty years of business.
Vince went on to explain that before he agreed to take on any particular product, he insisted that a booth be set up at the Rose Bowl Flea Market in Pasadena so he could see first-hand how well the product sold. I had previously been a cofounder/partner in two successful companies — toys and apparel — and we sold to mass merchants like Target and Walmart for the former and “high-end” department stores like Bloomingdales and even Barneys for the latter. The idea of selling at a flea market seemed beneath my pay grade, but I agreed to his terms with curiosity, and wow, (or Sham-Wow), I was glad that I did.
I secured a booth at the flea market and roped my son into helping me transport, set up and man a pop-up tent, boxes of product, folding table, etc. and we embarked at sunrise for the Rose Bowl on a sweltering August morning, the second Sunday of the month. After setting up, we stood behind the table as buyers strolled by. I displayed the Pops on several lollipop stands — each holding forty eight. The whole presentation looked immensely colorful and appealing. Initially, when attendance was sparse, people would stop, marvel at the Pops, and buy one or two. We had priced them at $3.99 each. By lunchtime we had sold about half a single display — 24 pops.
How did I come up with that price? I used Cost Plus pricing, which is to calculate the costs to make a product plus a mark-up. It is defined more fully below.
In addition, I researched packets of non-GMO, organic seeds and found that they ranged from about $2.00 to $4.99 depending on the vegetable, seed packager and store. My price point of $3.99 seemed reasonable.
Around lunchtime, Vince Offer showed up, looked around the table, observed the people buying the Pops, and after awhile said, “This is what we’re going to do. You have six different colors, six different vegetables. You’re going to offer people (Offer, ha!), $20.00 to buy five and we’ll give you the sixth Pop for fee.” Within an hour, we had sold out. In terms of price, that amounted to $3.33 per Pop instead of $3.99.
Price Setting Checklist
For setting prices I have developed a good model that includes the following nine steps which I will discuss in this article.
- Make sure there’s a demand for your product. Does the world need it?
- Why do a competitive analysis?
- Should you go into business or not based on your competitive analysis?
- How can you make your product unique and special wherever and whenever possible?
- What pricing model should you choose?
- How do you construct accurate cost sheets?
- How and why do you need to construct a demand curve?
- How do you find your Optimum Sales Level?
- What price should you choose?
Does the World Need Your Product?
This is a tough question and and there have been entire books written about it. I recommend reading, The Lean Startup, by Eric Ries. A good place to start is by asking, “Is this a product that I want or need or could use that I can’t find in the marketplace?” To quote an old saying, “Can I build a better mousetrap?” Or, “Can I make the mousetrap more affordable? Prettier?” The next thing you should do is research your closest competitors.
Why do a Competitive Analysis?
If you can somehow give the impression that your product is super special, build your brand awareness so that everyone wants your baby doll or cashmere sweater, then you can charge more. Building brand awareness is hard and expensive though. If you are making your shirt out of silk and your competitor is making it out of polyester, you can charge more for yours. If your workmanship is superior, you can charge more for that. And it depends where you’re selling it, too — online stores or brick and mortar. These are all considerations in setting a price. So start with a competitive analysis. List all your direct competitors and what they are charging. Make a note of how they have differentiated their products.
For me, I knew that there are a lot of seed starters out there, but they are all the same, all brown and boring cups, and I felt like I could build a better mousetrap. Together with my daughter, Cassie, we set about building a better mousetrap — hence, the SeedPops were born or created as it were in our kitchen with newspaper, my food processor, some donut hole trays, paint, soil, fertilizer, seeds, and my oven.
We then proceeded to apply for patents. Three years and thousands of dollars later, we received two patents on our product — a design patent and a utilitarian patent. We are currently going for a broader, third patent.
Should You Make This Product?
If you are making a product that is not patented or otherwise protected, and other companies are making a similar product for $50, you are not going to be able to charge $100.00. So, keep that in mind. If you cannot do it for $50 without losing money, then you’re probably in the wrong business or you have to closely examine your costs and see where you can save money.
How Do You Make Your Product Special ? — Tell a Story
Use a story: how did you get this idea, what is your background, why did you develop your product, why it’s unique, why it’s special, why someone should buy it. Stories are powerful, and the more authentic, the better. Spend your initial marketing resources on spreading your story.
I had been working with schools putting in school gardens for several years. I noticed that there are three things that made a big difference:
- It had to be fun for the kids or they wouldn’t do it.
- It had to be easy for the grownups or they wouldn’t do it.
- There had to be a story behind it. Every product needs a story.
I made up a mythical island in the South Pacific, called Bloomers Island, where evolution had taken a different path, and plants and trees became the intelligent species. On Bloomers Island, in the Age of Asparagus, when a flower or tree turned three (in plant years which is longer than human years), they had to go away to school. The school, held in the arms of Mr. Banyan, was under the tutelage of Professor Sage (who was always handing out sage advice). There, the Bloomers had to learn how to garden and grow their own food. My story became a series of books for Rodale Kids Publishing, an imprint of Random House Children’s books.
What is the reason for Bloomers Island? More than one in ten preschoolers today are considered obese. I wanted to improve a child’s relationship with vegetables to help them lead a healthier lifestyle.
My history? I grew up on a farm growing my own food, and with Bloomers Island, I went back to my roots to pass along my knowledge to children. And, we had learned in working with all the schools, that if a child grew a vegetable, over 90% would eat it.
Pricing decisions come down to competition, uniqueness of product, and story, but there are also pricing models to consider and they all have their plusses and minuses.
What Pricing Model Should You Choose?
Pricing of course, depends on what you are doing, e.g. software, consumer products, business to business, services. There are a lot of different pricing models and you’re probably personally familiar with most of them. Believe it or not, one pricing model is “free”. You may recognize Facebook or Twitter as free pricing that later — when they had enough users –could charge for advertising. There is also: subscription, freemium, hourly rates (many service providers), project-based, value-based pricing, equity pricing, velocity pricing, and cost plus pricing to name some. You can look all of these up, but for the purposes of this article, I’m going to focus on cost plus because that is where most of my experience lies and that is the most common method for consumer products.
I am also going to suggest selling directly to the consumer in the beginning, such as an online store or in my case, the flea market. It is the easiest way to go into business because you are not dependent on selling to a store you can easily try different prices.
What is Cost Plus Pricing? I have a friend who is a new entrepreneur and recently started her own apparel company with a really cool product, The Papillon Wrap. I’m a hard sell and I love it. She is concerned that her online price matches her store price and are her prices too high? Are they too low? Is she making enough money to make her side hustle worth it? What should her sales channels be and how much should she charge for each of them? Should she put her products on sale? And when?
I explained to her the idea of the cost plus pricing model and told her to start with that. Cost plus pricing is to calculate the costs to produce your product, and then take a markup on the cost.
Why is an Accurate and Complete Cost Sheet So Important?
You have to start with a very accurate cost sheet including every tiny thing — every label, thread, tag, fabric, pattern, cutting, sewing, and so on. After adding all of your costs, double them — and that becomes your wholesale price. If you sell to a brick and mortar store, they would typically double it again for the end consumer. Understand that doubling the price is a 100% markup.
What you don’t want to do is make a careless mistake on calculating your costs that will affect your sales price. I’ve seen that happen. You cost your sewing at $5.00 an item when it’s really going to be $15.00. How do you determine your costs? Get firm quotes in writing from all your subcontractors and suppliers.
When I say you have to include every teeny tiny item, I mean it. Not just printing your hang tag, but the cost of the safety pin that attaches the tag. The plastic bag that you place your item in. Everything little thing. Make a spreadsheet or list it out on a piece of paper, it doesn’t matter what method you use. Just make sure you are accurate. This is vital because you don’t want to price your product below your cost. Sounds obvious, but if your costs are inaccurate, how do you really know?
Minimum Order Quantities or MOQs. If you are buying component parts from another manufacturer and most likely you will be, make sure you find out if there are minimums (MOQs) that you have to buy. Example: You are in the apparel business. You are going to print your fabulous graphic designs on camouflage t-shirts and sell them. You think you can sell 500 shirts to your friends. You go to your t-shirt manufacturer and put in an order for 500 camouflage t-shirts. She says, sorry, our minimum is 1,000. Don’t accept that. Haggle with her. Or, find a manufacturer who will sell you 500, even if you have to pay a premium. A very wise person (my accountant) taught me a saying for manufacturing or assembly:
First Loss is Best Loss. In other words, better to write-off fabric at $10.00 a yard than completed garments which use that fabric, plus sewing cost, thread, labels, etc. which may cost $30.00. Fabric is a smaller loss than a finished garment. The most common reason why companies go out of business is because they make too many products (inventory) and all their money is tied up in those products that they can’t sell.
Because we are using a cost plus pricing model, the direct to consumer sales price should be at least double your cost — more if you plan on selling to brick and mortar stores later because they will have to take their 100% markup.
For my example, because I was selling directly to the consumer, e.g. the Rose Bowl Flea Market, or if you selling through your own online store, you have the ability to do an A B Testing of sorts. You can change your price and see how that affects your sales! That was the genius of Vince Offer.
Why and How Do You Make Your Own Demand Curve?
A typical Demand Curve is negative. This is just common sense. The more you charge, the less you sell; price and quantity have an inverse relationship.
This is a microeconomic concept and like anything in economics, it’s sometimes more of an art than a science. Why? Because other things may come into play — like the time of day or the weather or one location is better than another. That’s why it’s good to try to hold all other things equal. This is obviously difficult if you are selling to brick and mortar retail stores because you sell to them in bulk and they set their own price. You can’t sell them two sweaters at $20.00 and 5 at $30.00. But if you are selling online directly to the end consumer, you can easily change the prices.
Again: that’s why I recommend you launch your product first by selling directly to the consumer.
Here is the very simple Demand Curve from that day at the flea market.
Pricing Psychology. You can see that when I charged $3.99, I only sold 24. But on the same day, with the same product, in the same place, when I lowered the price to $3.33, I sold 240. I didn’t sell it like that though — putting the price tag at $3.33 — I sold it in a different way: buy five get the sixth one for free. That is where the psychology comes in. People liked that they were getting all the different colors and all the different vegetables and they felt like they were getting it for a deal. Which they were.
Another way that psychology comes into play is when will buy more if the price is higher. This is called a Luxury Demand Curve — people think they are getting a more valuable item if the price is higher so they buy more.
How do You Find Your Optimum Sales Level?
What Price Generates the Highest Sales? After you test your different price levels, you should then figure out which price generates the highest sales volume. Your total sales or gross sales are just the quantity sold multiplied by the price. In my SeedPops example, clearly, my total sales were much higher at $3.33 vs. $3.99: $799.20 vs. $95.76 respectively, so it made sense to choose the price of $3.33, or buy five at $3.99 and get the sixth one for free which amounted to $3.33.
But let’s say you are selling blue jeans and the sales numbers were closer at the different prices.
Your customer’s demand might look like the gray chart below.
And your Demand Curve would look like this blue chart. At $30.00 you are going to sell 9,000 pieces and so on.
What Price Should You Choose?
Let’s calculate what your sales are at these different prices. Here we see that the highest revenue made is from pricing the jeans at $60.00. That is the price you should choose because it generates the most money.
Emotional Considerations. Almost worse than inaccurate costing or building too much inventory is to lowball your price because maybe you have an inferiority complex or you don’t think your products are worth it or you don’t think you are worthy or deserving. You’d be surprised how often this happens (including with yours truly).
Remember these four rules:
- I’m not going to be in business if I can’t make money doing it — unless this is a hobby.
- My products are worth the price I’m charging.
- My time/knowledge/ideas/processes are worth the price I’m charging.
- I’m not going to sell this to you if you are not willing and able to pay a fair price.
If Vince had told me to sell my SeedPops at $1.50, I wouldn’t have done it.
Recap on Pricing
- Make sure there’s a demand for your product.
- Do a competitive analysis.
- Make an intelligent decision whether you should go into business or not. If you can’t produce and price your product in a way that makes sense, don’t make it.
- Make your product unique and special wherever and whenever possible.
- Put together accurate cost sheets.
- Construct your demand curve. a) Decide on a range of prices to try. b) Test selling to the end user at the different prices. c) Keep track of how much you sell at each price. d) Make sure those prices are close to double your cost.
- Find your Optimum Sales Level — multiply quantity sold times your price.
- Choose the price that generates the highest level of sales.
Final Note: you don’t have to make excuses for your pricing and I don’t think you really have to apologize for early adopters that your prices are now lower. Think about the first customers for the calculator. They paid hundreds of dollars for something that we get for free on our phones. Hewlett Packard is not worrying over the fact that early customers paid $200.00 for one of their calculators.
And what happened to me and my SeedPops? I decided not to do an infomercial with Vince — I went the way of getting a licensee to license my invention. They do the manufacturing and sales and pay me a royalty. My SeedPops are now found in thousands of stores all across North America including Target.
On a side note, my attorney also asked a friend of hers to meet me at the flea market that day because he was a consultant that helps companies expand overseas. I am currently in talks with a Dutch company to sell SeedPops in Europe, and a company for Australian distribution. That consultant and me? We are now a couple.
I’d love to hear your experience with pricing and any questions you might have.
