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Product Pricing Strategy - Why Go Cheap?

By Edited Nov 25, 2015 1 2

Whenever an entrepreneur, or any business owner for that matter, creates a new product, he must consider which product pricing strategy to utilize. More often than not, if you ask an entrepreneur what his goal is, he will tell you that he would like to sell the highest quality product or service (depending on the industry) for the most affordable price. The thought process is usually that this type of product will appeal to the most people and, ultimately, consumers. This is an extremely noble goal to achieve, as everyone loves to see high quality, affordable products enter the market regularly. The problem is, this product pricing strategy makes zero sense as a businessman.

As a business owner or product creator, your main goal is to create a product that provides you with revenue. The more revenue you bring in, the more likely you are to make profits, and larger profits at that. These profits will either provide you with financial comfort or allow you to expand your business and increase your financial success in the long run. Oftentimes, creating a high quality product increases the costs of labor and supplies, making them much higher than similar expenses related to producing a lower quality product; therefore, marketing a product that is both high quality and affordable is devastating to total profits. Let's look at two basic equations:

(1) Revenue = Sales Price x Units Sold

(2) Profits = Revenue - Expenses

When considering equation number one, we must realize that if we cut sales price in half, we will have to double our total sales simply to maintain revenue levels ($100 price x 50 units = $5,000 revenue; $50 price x 100 units = $5,000 revenue). Doubling sales takes a lot of work, even with a reduction in the overall price of the product. Individuals who are willing to buy your product at $100 will certainly buy your product if it costs $50, but will the number of individuals that will choose to buy the product once it is offered for $50 outweigh the decrease in total revenue significantly enough for this change to be worth it monetarily?

Furthermore, by creating a high quality product, you are most likely increasing expenses (for labor, supplies, etc.). When you continue on your quest for sales by in turn making this high quality product affordable, you will significantly hinder your profit potential (low revenue in association with high expenses). So, even if you do manage to sell twice as many units at these levels, the increased expenses associated with the higher quality will strain your profits. You will now be working harder to sell products to more individuals without seeing a related increase in revenue!

Are you doomed to working endless hours for pennies? Of course not! There are numerous companies in today's society that have bucked the ever popular trend of creating high quality affordable goods. Instead, they provide consumers with extremely high quality, highly priced goods. Examples of these companies are Apple, Mercedes Benz, and Prada. They have it right.

By implementing a high price for high quality products, consumers get the quality that they expect from the product, while business owners still see rewarding profits. This allows these businesses to expand and further prosper while still maintaining consumer satisfaction. Less buyers are needed to see significant revenue, making work more manageable and less time consuming. To increase your entrepreneurial success levels and future income, consider implementing this "high quality for a high price" strategy when creating future products.



Jul 23, 2010 7:18am
this looks like something out of a consulting case book! Amazing article! Absolutely agree with you!!!
Jul 23, 2010 10:46am
Thanks for the compliments marianneliz! I'm glad you liked the article :)
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