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Sharon Vinderine

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Where Many Startups Falter? Overpricing The Product

Posted: 10/24/2012 12:12 pm

As entrepreneurs, our instinct is to build our efforts and hours of hard labour into the final prices of our products or services. It's the result of our original ideas and our perseverance and these factors should be taken into consideration when it comes to pricing, right?

Wrong.

As CEO of a product testing company, I have encountered hundreds of entrepreneurs with unique ideas who are quite brilliant and determined and who have the guts to take a concept and turn it into a business. Most of them stumble with their pricing model. In too many cases, startups with no prior entrepreneurial experience overprice their product. They add the value of blood, sweat and tears into their calculations and factor in some arbitrary multipliers, and the end results are prices that far exceed the amount end users are willing to pay.

In my previous startup, I came up with an original idea, I was first to market, I invested a year of my time developing it and then I tried to retail it at a price point that reflected my effort instead of one the market could bear. Needless to say, the product line did not sell out.

When developing pricing strategies there are several things to consider:

  • Determine your costs. Don't over-inflate them, be honest with yourself and base it on fact versus emotion. With services this can be trickier but make sure to factor in your fixed costs and to assign a rate to your time and that of your employees.
  • Don't adjust your pricing regularly to compete with each new player in the marketplace. If your price is based on cost plus a reasonable profit margin then don't budge simply because a new competitor has come into play that is selling for a few dollars less. Don't ignore your competition but differentiate yourself through the value you offer rather than a price war.
  • Stand out from your competition. Our awards program is a perfect example of this business strategy. There are likely hundreds of awards companies across North America, each offering a similar service at a similar rate. Our business is ranked as one of the most expensive awards companies because we don't do things the way others do. Our customer service exceeds all expectations, our media coverage far exceeds any other player in the market, and our brand has become one of the most highly recognized family awards programs in North America. Gaining this type of notoriety has a substantial cost associated with it and it allows us to stand out from our competition. This results in loyal clients who come back year after year.
  • Everyone needs cash flow and likely has a loss-leader product or service to maintain it, even if it is not the most profitable product or service offering. Don't drop this product because its margins might not be as strong as some of your other offerings. Consider it a first step in building customer confidence and an investment in future opportunity. Use this loss leader to wow your client and to exceed expectations.

My job is not to advise clients on their pricing strategies, but I read through hundreds of product evaluations every month. The overwhelming response from our testers when it comes to products that are made by startups is that they are overpriced.

Client acquisition and brand loyalty are hard to come by. If you scare off a customer with your pricing from the outset, you will likely brand yourself as "that expensive company." Remove emotion from the equation, remove the sweat equity, and make sure you deliver value.

Stand out from your competitors with a proposition that clients can't refuse, and you are sure to gain loyal brand ambassadors.

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  • Movie Theater Popcorn And Candy

    What’s harder to digest: (1) Movie theater popcorn has an average markup of 1,275 percent, or (2) With a soda, that popcorn has a caloric equivalent of three McDonald’s Quarter Pounders? Nutrition aside, concessions like $5 tubs of popcorn and $6 boxes of gummy worms are big revenue streams for movie theaters. Since most theaters prohibit moviegoers from bringing in outside food and drinks, the way to save is to bypass concessions altogether. If you can’t, find your cinematic savings elsewhere, like getting a five-pack of movie tickets for $30 at CinemaDeals.com.

  • Prescription Drugs

    Astronomical prescription drug prices – with markups ranging from 200 to 3,000 percent – are enough to give patients a headache. In fact, price hikes caught the eye of Arizona’s Attorney General Tom Horne, who is suing pharmaceuticals distributor McKesson Corp. for markups on Allegra, Celebrex, Coumadin, Flonase, Lipitor, and Valium. To save on prescriptions, ask your doctor for free samples and about generic substitutes. Comparison-shopping is also a great idea. Walmart, Target, and warehouse stores like Costco are good places to start. And take advantage of mail-order suppliers like Express Scripts if your prescription-drug plan offers it. Check out 10 Tips to Safely Save on Prescriptions.

  • Diamonds

    Shoppers in the market for a diamond should be prepared to pay anywhere from 50 percent to 200 percent more than the wholesale cost, according to TheStreet.com. Information at this Google Answers page suggests markups range from 50 to 400 percent. A diamond’s sparkle may cause shoppers to turn a blind eye to the price tag, but you can land a better deal by understanding what you’re buying and doing a lot of shopping. Read our Guide to Buying Diamonds in 5 Simple Steps.

  • Bottled Water

    Some claim bottled water’s markup reaches 4,000 percent – more expensive than gasoline. Saving is simple: drink tap water. If you’re concerned about taste or quality, use a water filtration system.

  • Salad Bars

    Some salad bar items are marked up more than 350 percent, according to Food Network Magazine. Items that aren’t worth their weight: chickpeas (386 percent markup over retail), radishes (302 percent), and baby corn (277 percent). To save, load up on the lighter items that cost less than you’d pay at the grocery store, like bacon bits (55 percent markdown) and grilled chicken (44 percent).

  • Eyeglass Frames

    Dishing out $450 for Armani frames? Markups for eyeglass frames can reach 1,000 percent. That’s certainly not unheard of. Fortunately, focusing on warehouse stores and the Internet can help you find discounts. Check out <a href="http://www.moneytalksnews.com/2012/07/06/8-ways-to-see-big-savings-on-eyeglasses/">8 Ways to Save on Eyeglasses</a> for more ways to save up to 90 percent.

  • Soda

    Order a glass of Coke when you’re dining out, and you could pay 300 to 600 percent over cost. Sure, you know going into a restaurant that you’re paying for the service and ambiance too. But if you’re looking to save without sacrificing a night out, skip the extras like soda and opt for water instead.

  • Text Messages

    Outgoing text messages on a cell phone can cost the provider three-tenths of a cent, but users up to 20 cents – that translates to a 6,000 percent markup. Some plans charge 10,000 times more for sending a text than other types of data. If you frequently send text messages, get an unlimited plan.

  • Wine/Champagne

    It’s not uncommon for restaurants to charge two or even three times retail for a bottle of wine. Order by the glass, and you’re sipping on an item marked up as much as 400 percent. So scan the menu for a reasonably priced bottle (tip: look for house wines).

  • Hotel Minibars

    Whether you’re reaching for a Snickers or a toothpaste kit, minibar markups can hit 400 percent. Some of the most ludicrous minibar prices, according to Oyster.com: $14 gummy bears at Omni Berkshire Place and a $10 bottle of water at the Mansfield Hotel. Simple solution: Leave your room.

  • Coffee And Tea

    Lattes are one of life’s little luxuries, but they can be marked up by 300 percent. If you’re looking to save, start by turning on your coffeemaker and bypassing the coffee shop.

  • Handbags

    Some of the world’s most expensive handbags: a $3.8 million purse made by The House of Mouawad in Dubai that’s adorned with more than 4,000 colorless diamonds and a $1.9 million Hermes Birkin bag. Women own an average of 10 handbags and spend an average of $148 on a handbag “splurge,” according to a ShopSmart poll. Keep more cash in your purse by comparison-shopping online and in outlet stores. For more tips, read our story on Finding Designer Accessories at Deep Discounts.

  • Designer Jeans

    A $665 price tag on Gucci jeans and $225 for Sevens proves some shoppers are willing to go to great lengths for fashion. But these designer items are grossly overpriced. According to <a href="http://online.wsj.com/article/SB10001424052702303365804576429730284498872.html">The Wall Street Journal</a>, it costs about $50 to make True Religion’s best-selling jeans, Super T Jeans, but the wholesale price reaches $152 and the average retail price is inflated to $335.

  • Bakery Goods

    For items that can easily be baked at home, you could be paying a 100 percent markup. Granted, convenience is a factor, and maybe a baker is a better cook than you. If so, a good cookbook could offer a decent return on investment.

  • Greeting Cards

    Greeting cards are simple pieces of paper with a 200 percent markup. And that’s before factoring in so-called “Hallmark holidays.” On a budget? Make your own cards – or better yet, if you have school-aged children, have them design one. This will likely amount to a more sentimental gesture and will leave a lasting impression.

  • College Textbooks

    Most college students will shell out about $655 for required textbooks this year, <a href="http://www.nacs.org/advocacynewsmedia/pressreleases/studentspendingontextbookscontinuestodecline.aspx">according to </a>the National Association of College Stores. It’s no secret that most of these books come with monster markups. Read <a href="http://www.moneytalksnews.com/2012/08/08/11-ways-to-save-big-on-college-textbooks/">11 Ways to Save Big on College Textbooks</a> for cost-cutting tips, from asking professors about coursework in advance to textbook rentals.

  • Flowers

    An orchid can cost up to $25 per stem. Add Valentine’s Day or a wedding into the mix, and prices can surge. While disregarding flower purchases altogether isn’t always an option, shopping around for the best price is. Check out online retailers, and buy in season to help cut costs.

  • Produce

    Produce is often marked up as much as 75 percent. Buying in season is the best way to find a bargain. As we <a href="http://www.moneytalksnews.com/2012/09/19/the-best-time-to-save-on-everything/">explain</a> in our Seasonal Savings post, look for deals on grapefruits and oranges in January, asparagus in March, and melons in May. Also steer clear of pre-cut veggies and fruit, which often have an additional markup of about 40 percent.

  • Furniture And Mattresses

    Furniture stores usually make a hefty margin, with <a href="http://www.smartmoney.com/spend/rip-offs/10-things-furniture-stores-wont-tell-you-1296850666159/">markups</a> of about 80 percent. Try to shop during sales, but if your timing is off, don’t be afraid to negotiate a better price. Also take note of the product number and then search online to see if any other retailers offer a lower price.

  • Cosmetics

    The average markup on cosmetics: 78 percent. Since most cosmetics are made from various combinations of dirt, oil, wax, and fragrance, it’s surprising that shoppers pay such a premium. But thanks to anti-aging claims and celebrity-endorsed marketing, shoppers have been breaking the bank to look younger and more beautiful for years. Fortunately, there are some simple ways to get <a href="http://www.moneytalksnews.com/2011/07/07/6-tips-save-beauty-products/">more bang for your buck</a> when purchasing beauty products (hint: skip the drugstores and load up on free samples).

 

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