Productivity Software, Business Services & Internet Products for SMEs.

First Things First, What is a Domain Name?

A “domain name” is a fancy term which simply refers to what you see in your web browser’s address bar when you visit website. Examples include “google.com”, “greenpeace.org” and our favorite website address, you guessed it, “helpsme.com”. A domain name identifies a location on the Internet where a website can be found.

Each domain name is unique, just as every real world house address is unique. This is necessary so that when you type an address into your browser, you reach the website you were looking for. To make sure each domain name is unique, An organization named ICANN coordinates these domain names across the world. This is partly why there’s an annual cost to owning a domain name.

.COM .NET .ORG – What Does it All Mean?

Domain names have two parts. If we use the example domain name “mysite.com”, the part before the dot identifies the site’s name (“mysite” in this example). The part after the dot (“com”) is called the “Top Level Domain”. Top Level Domains can be though of categories into which Internet addresses are divided. The Top Level Domain or domain suffix (.com, .org, .gov), is often used to identify the type of website you’re visiting.

Here are a few examples and what they are often used for:

.org – non-profit organizations
.com – commercial organizations
.gov – U.S. governmental agencies
.net – general purpose
.ca – Canadian

The question then becomes – do you have to use a “.org” for a non-profit, a “.com” for a  commercial company and so on? The answer is no. Many non-profits use “.com”. However, there are certain unwritten guidelines to follow. For example, it might be perceived as a bit peculiar if Microsoft were to use a .org suffix – as in “microsoft.org”.

Domain Suffix Restrictions

Many suffixes like “.com “and “.net” are available for anyone. Many others have restrictions. For example, “.gov” and “.mil” are reserved for US government agencies and the US military respectively.

Wikipedia has a list of domain suffixes.

Registering a Domain Name

In order to use a domain name, you need to claim it first. You claim a domain name by “registering” it, which basically means buying a subscription to use the domain name. You can only register a particular domain name if nobody else has already registered it. There are many companies that provide domain registration services. A domain registrar will let you search for domains. It’s best to find a reliable domain registrar that offers reasonable prices.

It may seem self serving to mention that we offer domain registration services, but rest assured, we wouldn’t want to lose your goodwill by selling you on something that doesn’t offer excellent value. You’ll be hard pressed to find better prices and reliability elsewhere.

If you decide to use our domain registration services , the process is as follows:

1. Visit our domain registration page
2. Search for and find an available domain name
3. Add the domain name to your shopping cart and follow the instructions

The Domain Name I Wan’t Isn’t Available, What do I Do?

Nowadays you’d be considered lucky if you were to find the domain name you want on your first search. The fact is that many desirable domain names are already registered by businesses or individuals. Some individuals even register domain names with the intent of selling them to their rightful owner at an inflated price. This is known as “cybersquatting”.

The good news is that if you hold a trademark to a name that has been registered by someone else, you can challenge that reservation.

If your organization is new and you haven’t chosen a name yet, you may be able to buy the domain name you want if it’s for sale by the current registrant. Domain prices vary widely. If the domain name you want is prohibitively expensive, you’ll probably have to find an alternative name.

Domain Name Expiration

When you buy a domain name, you’re actually getting a subscription to use the name for a specific period of time. The length of time depends on the time period you’ve paid for, usually between 1 and 10 years. Your registrar will send you an email notification 30 to 60 days before your domain subscription expires to let you know that it should be renewed. You can keep renewing your subscription for as long as you want the domain name.

If you don’t renew your domain name subscription within 60 days of expiration, the name may be made available to the public. Make sure your registrar has your up-to-date email address or you may never receive their notifications. 

Choosing a Name – Branding Considerations

If you’re registering a domain name for an existing business, you’ll likely want to incorporate the name of the business in the domain name.

For a completely new business, you’re more likely to be free to choose from a wider range of possibilities.

Here are some general tips or strategies for choosing a brand name:

• Make the name memorable, short and easy to pronounce
• Effective names often use rhyming (Lean Cuisine), imagery (Blackberry, Jaguar) or alliteration (Coca Cola, Krispy Kreme)
• Avoid using location in a name because you risk turning off potential customers when your business grows
• Avoid using “.biz” or “.net” domain names. This leaves the impression that you’ve settled for what was left over. Use an alternative .com instead. Regional domain names ( “.au”, “.ca” etc.) may not be ideal from a branding standpoint, but you can get away with using them
• Avoid using another company’s name or trademarks in your domain name. Otherwise, you’re just asking for trouble.

Branding decisions are important to company strategy and a powerful product differentiation tool. Some companies brand individual products separately while others build company brands that span their entire product lines. But what exactly is a brand?

Definition of a brand

The American Marketing Association defines a brand as:

“A name, term, design, symbol, or any other feature that identifies one seller’s good or service as distinct from those of other sellers. A brand may identify one item, a family of items, or all items of that seller.”

Basically, a brand identifies a seller, manufacturer or product via logos , names, trademarks, or other symbols. A brand represents a seller’s promise to deliver specific benefits consistently to buyers. But this doesn’t tell the whole story. Brands can convey multiple meanings including:

• Attributes & benefits: A brand says something about the product’s attributes such as quality and durability. Customers care less about attributes than benefits. Attributes must be translated to benefits (emotional or functional) in the eyes of the consumer. A high quality attribute could translate into the benefit of “less hassle and maintenance”.
• Culture: A brand like Toyota can bring to mind certain culture and values. Toyota represents Japanese culture – efficient, organized, high quality.
• Personality: A brand can represent a certain human characteristics. For example, Levi’s represents sensuality, rebellion and being cool. A brand’s personality can suggest the type of customer that uses the product.
• The branding challenge is to develop deep positive meanings for the brand in the eyes of the consumer. When choosing meanings to associate with a brand, it’s important to focus on benefits rather than attributes. Benefits are what interests customers.

Brand power

Brand power varies from brand to brand. At one extreme, some brands are completely unknown to most buyers. On the other hand, some brands (such as Heinz and Mercedes) command a high degree of brand awareness. The higher the brand power, the more likely customers will stay with the product, value the brand, and even be devoted to the brand.

To maintain a strong brand, it needs to be carefully managed so that it doesn’t depreciate. This means improving brand awareness, perceived benefits, and positive associations. This requires investment in R&D, adept advertising and excellent customer service.

To Brand or Not to Brand

Sophisticated branding is a relatively recent phenomenon. In the past, most products were sold out of barrels, carts and bins, completely unbranded. Branding requires effort and cost, yet today, most products are branded. There are products sold as generic (or unbranded) alternatives to branded versions. Clearly however, many manufacturers and suppliers consider the costs worth the benefit. What are some benefits to branding?

• Branding can help build a positive corporate image, allowing for new products from the seller to gain acceptance more quickly or easily
• Branding can help bring about customer loyalty. This helps insulate the seller from competition
• Brands and trademarks help provide the seller legal protection of unique product features
• Branded products are preferred by many customers because it makes it easier for them to compare quality and shop more efficiently

Choosing a brand name

Before choosing a brand name, a branding strategy has to be chosen. There are 4 commonly used branding strategies.

1. Blanket product family names: Under this strategy, all products are branded under the same name. Most small and medium-sized companies use this strategy. It has the advantage of incurring less costs for name research and advertising to build up brand awareness. Additionally, if the brand name is strong, new products under that brand will more likely have strong sales.
2. Individual product brand names: Each product has its own brand name which is different from the company name. This strategy is often used by larger companies. It has the advantage that the if the product fails or is seen to be of low quality, the company’s reputation is not hurt. The downside is that branding each product incurs extra costs.
3. Separate product family names: Companies with products that are quite different, it’s often better to use separate family names. For example, Sears uses the name “Kenmore” for appliances and “Craftsman” for tools. Additionally, companies often use different brand names for products lines in the same family if the product lines have different quality standards. A ketchup maker may sell higher quality ketchup under its brand name and a lower quality using a different or generic name.
4. Company name combined with individual product names: The company name legitimizes the product while the product name serves to individualize the product. At the time of this writing, Hewlett-Packard uses “HP Pavilion”, “HP Envy”, and “HP Touchsmart” as product names for its different laptops. Kellogg uses names such as “Kellogg’s Cornflakes” and “Kellogg’s Rice Krispies” for its different cereals.

Once a brand name strategy has been chosen, it’s time to pick out a specific name or names. Companies commonly chose the name of a person (Gillet, Honda), quality (Duracell), lifestyle (Levi, Apple), or an artificial name (Häagen-Dazs, YouTube).

Coming up with a brand name can be a difficult process. There are some guidelines that can simplify the process. Successful brand names often have at least one of the following attributes. They:

• Are easy to pronounce, remember, recognize and sound pleasant: Coca Cola, Lululemon
• Say something about the product’s benefits: Pizza Hut, Duracell
• Suggest something about the product’s qualities such as a color or action: Mr. Clean, Fido
• Are distinctive: Nike, Kodak
• Avoid negative meanings in other languages: Nova (“doesn’t go” in Spanish)

Outsourcing the brand name decision is also an option. There are companies that specialize in coming up with brand names for their customers. The top firms in this industry charge a lot of money but larger companies often find the cost worth while. There are many smaller consultants available that cater to businesses that don’t have a lot of cash available. Of course, smaller consultants usually have fewer resources at their disposal.

Repositioning Brands

Even companies with strong brand positions usually have to reposition their brand eventually. Many companies change their branding strategies gradually and sometimes drastically in response to new competitors and other changing industry factors.

What makes your offering different from the rest? What can you do to stand out from the pack? This article deals with the concept of product differentiation. It’s a topic relevant to all businesses and a core marketing concept.

Depending on the industry and product offering, varying degrees of differentiation are possible. At one extreme, products such as cars, video games, and furniture, offer a high potential for differentiation. On the other extreme, steel, aspirin and rubbing alcohol offer much a much lower potential for differentiation. Nevertheless at least some meaningful differentiation is possible with virtually all offerings. Here we outline some of the areas products and services can be differentiated. Consider the areas that make sense for your offering. We’ll also discuss which differences, and how many differences should be promoted.

Physical Product Differentiation

• Features: A product can be offered with characteristics that add to its primary functionality. Innovating by adding new features that the competition doesn’t offer is often an excellent way to compete.
• Style: Buyers are usually willing to pay more for products that have an attractive look or feel. Apple is able to charge more for its computers in part because of Apple’s focus on a slick user interface and product appearance.
• Performance and Conformance Quality: Most products and services can be provided with varying degrees of quality. Customers are usually willing to pay more for higher quality products – quality in terms of performance levels as well as the degree to which all units produced are identical (conformance). There is usually a positive correlation between product quality and profitability – as quality goes up, so does profitability because higher prices can be charged. The increased costs associated with quality are often less than the extra revenue generated by the price increases. Firms with higher quality products tend to command higher levels of customer loyalty and benefit from promotion through word of mouth. This doesn’t mean that you should go for the maximum possible quality. At a certain point it becomes prohibitively expensive to increase quality further.
• Physical Form: The shape, size, color and other physical product attributes can usually be differentiated. Wood pencils are essentially a commodity but even they can be differentiated – by color, eraser type, graphite mixture (the “lead”) for example.
• Reliability: Customers tend to prefer products that are less likely to fail or malfunction
• Repair-ability: Customers prefer products that are easy to repair.
• Durability: Customers usually prefer products offerings that last longer and can endure more “use and abuse”.

Customer Service Differentiation
 

• Maintenance and Repair: Offering service programs to help customers keep their products in good working order can be an effective selling point.
• Ordering Ease: Customers generally prefer making orders with ease. This is why many businesses offer telephone and online ordering options.
• Product Delivery: Customers prefer to have their products delivered quickly, accurately and undamaged.
• Installation: Ease of installation is an effective differentiator especially if the product is technological in nature and the customer is not “tech savvy”.
• Customer Training: Some companies train the customer’s employees on how to use the product. It’s common in the medical industry for vendors to train hospital staff on medical equipment for example.
• Customer Consulting: Some companies add value by offering information and advising services in addition to their primary product offerings.

Personnel, Distribution Channel and Image Differentiation
 

• Personnel: Staff are the front line for businesses. Differentiating through better trained employees can bring about a significant competitive advantage. Better trained people tend to be more competent, credible, reliable and responsive.

• Distribution Channel: Improving the performance of your distribution channel can lead to significant competitive advantages. Part of Walmart’s success is due to the quick flow of information between Walmart and its distribution partners. Suppliers know when it’s time to ship more product because they are electronically connected to Walmart’s inventory systems.
• Image: Companies work hard to attribute specific images to their brands. Apple has successfully branded its computers to have a trendier, “cooler” image than Microsoft Windows. Apple’s differentiation efforts have been extremely successful. Many consumers think of a “Mac” as being something other than a PC. “PC” stands for “Personal Computer”, which is exactly what a Mac is! Symbols (like Apple’s apple), media (advertisements, brochures etc.) and event sponsorship are all used to build company image.

Which Differences to Promote?

As discussed, product offerings can usually be differentiated along many attributes. Choosing where to focus your differentiation and improvement efforts means considering three main questions:

• How important is the attribute in question to customers?

• Does the company have sufficient resources to implement the required improvement?

• How quickly can the desired improvement be implemented?

As an example, let’s say a company knows that customer service is perceived as highly important to customers. If the company is lacking in this area, efforts should be made to improve service. If the company cannot afford to improve service in the short run or if service improvements will take too long to implement, then an alternative product difference should be promoted. If the company already has a strong service performance but customers are unaware, then it’s a matter of communicating the difference to the market.

How Many Differences to Promote?

Many marketers believe it’s important to choose one main difference and focus promotion efforts on it. The chosen feature should be unique among competitors. Top positioning focus can include “best service”, “best quality”, “most durability”, “most convenient” and so on.

Not everybody agrees that differentiation efforts should focus on only one feature. This is especially true if more than one competitor claims to be the best in a certain area. Some companies successfully differentiate their products on two or three benefits. As a general rule, as the number of benefits promoted increases, the chances of effective differentiation decreases.

The following are several common positioning mistakes:

• Under-positioning: Often, companies find that their target market has only a vague idea about the product offering. This is often a result of promoting benefits that aren’t significant or different enough from the competition. The product is seen a “the same thing” as competing offers in the market place.
• Narrow-positioning: Focusing too narrowly on specific product benefits can lead customers to believe the product is less useful than it actually is.
• Confused positioning: Changing the brand’s positioning frequently or promoting too many features can lead to confused consumers.
• Doubtful positioning: Just because a claim is made, it doesn’t mean customers will believe it. Customers may already preconceptions about a product’s performance. Customers often doubt claims that differ greatly from these preconceptions. In other words, avoid trying to pass off a Lada as a Rolls Royce.

The Concept of Competition

Competitors, as it relates to marketing, are companies that satisfy the same customer need or want. Someone in the market for a car wants “a means of transportation” – subways, buses, bicycles can meet that need. From a marketing perspective, the concept of competition involves a broad set of potential and actual competitors.

Dealing with competitors is important but don’t lose sight of who’s most important – customers. Be alert and watch for weaknesses (yours and those of your competitors) but goals, rather than competitors, should be the main driving force of your business activities.

The Importance of Identifying Latent Competitors

Identifying competitors might sound like a simple task. No doubt Toyota realizes that Honda is a major competitor, and Coca-Cola knows that Pepsi-Cola is a competitor. The actual range of competition most companies face is much broader than the obvious. Your company is more likely to be hurt by new technologies or emerging competitors than by known competitors.

We can look to the classic example of how in Canada, Barnes & Noble, Indigo and Chapters were all competing to build the most stores where customers could spend their time reading while sipping coffee. At the same time, Jeffry Bezos was building Amazon.com, exclusively online. This had the advantage of providing an enormous selection of books without the cost of stocking large inventories and the overhead of brick-and-mortar megastores. The incumbents scrambled to play catch up in building online stores yet, at the time of this writing, Amazon still dominates Internet sales. The “traditional” bookstores have survived in this case, however focusing on current competitors instead of the latent ones has been the downfall of many businesses. Amazon and Barnes & Noble are all big companies, but the same lesson applies to small businesses as well.

Analyzing Competitors

Once competitors have been identified, it’s important to try to identify their objectives, strengths and weaknesses and their reaction patterns. This make it easier to anticipate competitor moves and come up with successful strategies to deal with them.

• Objectives: What are your competitors looking for in the marketplace? For example, are they trying to increase market share or maximize current profits?
• Strengths and weaknesses: How dominant is each competitor in the marketplace? Can any given competitor control the behavior of other competitors? How much market share does each main competitor have and what are their product quality levels?
• Reaction patterns: Businesses deal with competition in different ways but most companies fall into one of four categories.
  1. Laid-back competitors: Are ones that react slowly and weakly to competitor moves. It doesn’t necessarily mean the company lacks funds to react, it may be that they feel their customers are loyal or are slow in noticing the move.
  2. Selective competitors: Are ones that react only to certain types of attacks, such as to price cuts but not advertising increases.
  3. “Respond to all” competitors: Are ones that react strongly and quickly to any attack.
  4. Unpredictable competitors: Are ones that don’t seem to have any kind of pattern to their reactions. Small companies are often the unpredictable ones because they tend to compete on a variety of fronts when they can afford to.

Gathering Information on the Competition

It’s not always easy to find out about the your competitors, nevertheless information is often available from a variety of sources.

Your sales force, suppliers, market research firms, trade associations and published data can be excellent sources of information. If you have a former employee of a competitor as part of your staff, have him or her serve as the resident expert on that competitor.

Use competitor websites to find out information on what they are doing to attract customers and partners. Many post press releases on their websites announcing new products. Trade association websites are also valuable because they often provide information about industry players.

Stay away from information gathering methods of questionable legality or ethics. Some companies have been discovered buying their competitors’ garbage and holding interviews for non-existent jobs to get information from competitor employees.

General Attack Strategies

Attacking a competitor on several fronts or head-on by matching their marketing mix (products, pricing, advertising and distribution) is often a difficult approach, especially if the competitor enjoys advantages such as larger market share. However, direct attacks can be effective if the competitor commands fewer resources.

A better approach for smaller firms is to attack indirectly. One way is to spot areas where the competitor is underperforming and to better serve those areas. These areas could be untapped geographic locations or uncovered market needs. In other words, attacking indirectly means identifying shifts in market segments that cause supply gaps to develop, and then filling in those gaps while developing them into stronger segments. This is the essence of marketing, discovering needs and satisfying them.

Most companies target weaker competitors because it’s less costly, but this usually results in small gains. Remember, even strong competitors have weaknesses that can be exploited.

Specific Attack Strategies

Depending on the particular situation, different strategies should be developed. Some of these include:

• Intensive advertising and promotion: Increasing advertising and promotion expenditures makes sense if your product or advertising message is superior.
• Price discounts: To successfully offer a comparable product at a lower price, you have to convince buyers that your product is similar to that of the competitor and that the competitor won’t lower prices in response. Buyers must also be price sensitive for price discounts to have an effect.
• Cheaper products: Offering average or low-quality products at a much lower price can work, but his strategy is vulnerable to competitors with even lower prices.
• Prestige products: Launching a higher quality product at a higher price than the market leader can work well if customers can be made aware of the quality difference.
• Product variety: Giving buyers more choice can help build market share. Baskin-Robins is an example, it opened stores that served 31 flavors of ice-cream while most offered just a few.
• Product innovation: Product innovations or improvements help differentiate offerings from those of the competition.
• Cost reductions: Reducing manufacturing, labor or purchasing costs can create a lot of options when it comes to dealing with competition. Savings can be used to fund advertising, promotions and other activities.
• Service improvements: Serving customers better than the competition is another differentiator.
• Distribution changes: Using different or improved distribution channels can give an edge. Victoria Secret became a major women’s wear company by perfecting catalog sales instead of battling other firms in traditional stores.

In this article, we turn our attention to situations where price changes might be needed and how to manage these changes.

Raising Prices

Successful price increases are can increase profitability significantly. This is especially true if profit margins are low. Let’s look at a simple example to illustrate. Below we show how a 1% price increase can result in a 20% profit increase assuming sales volume doesn’t change.

Price increases are often unavoidable in the long run because of cost inflation. As the costs of doing business (materials, labor etc.) increase, price increases follow. Inflation also adds to the risks of offering long-term price contracts.

Another common reason for price increases is for when there is more consumer demand for a product than the company can supply.

It’s important to be careful when increasing prices so as not to be seen as a “price gouger”. Consumers generally prefer prices to be raised gradually.

Besides simply increasing sticker prices sharply, “indirect” methods can be used to achieve similar results, reducing the chances of a negative impact on the company’s image:

• Reduce discounts: If discounts for bulk or early purchases are offered, these discounts can be reduced or eliminated.
• Unbundle: With unbundling, the company keeps the price as is but removes elements that were originally part of the offer. Examples include shifting from free to paid delivery, or no longer including batteries for electronic products.
• Reduce amount: Instead of raising prices, decreasing the amount of product. For example, reducing the amount of liquid in a soft drink or juice bottle.
• Reduce variety: Offering less product options or variations can reduce costs.
• Reduce features: Reducing or removing product features can reduce cost.
• Substitute materials: Finding less expensive materials to use as product inputs. For example, many candy bars contain synthetic chocolate to mitigate cocoa price increases.

Care must be taken with these approaches because if product quality and features are reduced too much, customers will notice and sales may decrease.

It’s worth pointing out that customer perceptions to price increases aren’t always negative. Customers sometimes associate positive meaning to price increases – the product is “hot” or of superb value.

Customers are most sensitive to price increases for products that are expensive and bought frequently. They often don’t notice price changes to inexpensive products that are rarely bought.

Some customers care more about the cost of the product over the total lifespan of the product. For example, sellers can charge more for products if they can convince the customer that it will be less expensive in the long run because of savings on servicing and replacement.

Cutting Prices

Several common situations can arise where you may need to cut prices.

• When market share declines, price cuts are often used as an attempt to slow or stop the decrease.
• Price cuts are also used in attempts to dominate the market. Lower prices can lead to increased sales, the hope is to achieve lower average unit costs from increased production volume.
• Prices may be reduced as a form of promotion.
• During recessions, consumers typically spend less and companies often introduce price cuts.
• As products become older or obsolete, fewer customers remain interested. Price cuts can help stimulate sales.
• Manufacturers with excess plant capacity often cut prices to increase sales if they can’t do it through product improvement or additional sales efforts.

Be Careful!

It’s important to be careful when cutting prices as there are potential negative consequences:

• While a low price can help gain market share, it does not help gain customer loyalty. Usually, customers gained by cutting prices will be lost to competitors with even lower prices.
• Customers may assume the product quality is low or that it’s faulty, or about to be replaced by a new model.
• Price cuts can result in price wars, which hurt all businesses involved. Companies with less cash reserves are particularly vulnerable in price wars because they have less “staying power”.

Promotional pricing can help stimulate consumer interest and early purchase. It can also encourage the hesitant or unwilling to go ahead and buy. Here we outline several promotional pricing techniques.

• Special event pricing: To draw in more customers, sellers often discount prices for “special events” such as boxing day. Another example are the back-to-school sales every fall.
• Loss-leader pricing: Department stores, pharmacies and supermarkets commonly drop prices on well known brands or specific products to stimulate customer traffic. Sometimes prices are even dropped below cost. The hope is that the increased traffic will generate sales of other products and help promote the store.
• Low-interest financing: Commonly used by automakers, low interest or even no-interest financing is used to attract customers instead of cutting prices.
• Longer payment terms: Extending loans over longer periods of time to reduce customer monthly payments is a technique often used by mortgage banks and auto companies. Consumers often think in terms of what they can afford monthly, which can make this technique particularly effective.
• Warranties: A common technique is adding a free, or low cost warranty to help increase sales.

Discounts from normal prices are legitimate however avoid using illegal techniques such as artificially raising prices in order to offer a larger discount.

Warning

Promotional pricing can be effective for a while but it is usually not the best long-term strategy. If it doesn’t work, you end up wasting money that could have been used for better marketing campaigns. When it does work, it’s copied by competitors and loses its effectiveness.

In this article, we outline some common pricing techniques and situations in which they might be used. We also discuss how consumer psychology, product quality and advertising can affect pricing levels. If you’re unfamiliar with terms like “fixed costs”, “variable costs” and “demand elasticity”, it will help to take a quick look at our article on determining demand and calculating costs before reading this article.

Typical pricing techniques include “markup”, “target-return”, “value”, “perceived-value” and “going-rate” pricing.

Markup Pricing

The simplest pricing method is to add a fixed percentage to costs. As mentioned in our article on pricing objectives, it’s usually better to use price as a strategic tool rather than let costs determine price, but sometimes there just aren’t any better alternatives. For example, it’s common for construction companies to estimate costs for a project, and add a standard markup as profit before submitting their bids.

We can illustrate numerically with another example. A microwave manufacturer expects the following costs and sales:

Variable cost per unit: $60
Fixed cost: $600,000
Expected sales: 80,000 units

The cost for each microwave (unit cost) = variable costs + fixed costs/unit sales = $60 + $600,000/80,000 = $67.50

If the manufacturer wants to markup the price by 15% on sales the price is:
Price with markup = unit cost/(1 – desired markup percentage) = $67.50/(1-0.15) = $79.41

Let’s say the manufacturer sells through a distributor who wants a 20% markup. The distributor will be charged $79.41 by the manufacturer and resell for $79.41/(1-0.20) = $99.26

Typical markups vary and are usually higher for seasonal products, slow moving products, specialty products, products with high storage costs and products for which demand is inelastic (demand stays relatively constant despite changes in price. For example gasoline and prescription drugs).

Using markup pricing is popular because easier than formulating a price by accounting for demand, competition and perceived value. Also, many feel cost pricing is fairer to sellers and buyers because sellers are not “taking advantage” of buyers when demand increases. As mentioned however, markup pricing it usually means reduced company performance.

Target-Return Pricing

With target-return pricing, price is determined based on a desired return on investment (ROI). Using our microwave manufacturer from the above example, let’s say the company invests $2 million in the business and wants to earn a 25% ROI which equals $500,000.

Target-return price is given by: unit cost + (desired return x invested capital/unit sales)

For our example: price = $67.50 + 0.25 x $1,500,000/80,000 = $72.19

This example assumes the manufacturer will sell 80,000 units but what if sales don’t reach this number or exceed it? Target-return pricing tends to ignore the effect of changing prices on demand and competition. It’s important to keep probable impacts on sales and profits with different pricing.

A handy tool is the “break-even” and “profitability” analysis. A profitability analysis lets us see what happens to profit with different sales levels. A break-even analysis lets us figure out sales levels needed to neither make a profit nor lose money.

By analysing returns in this way it also becomes obvious that finding ways to lower costs is important for increasing profits.

For break-even and profitability analysis tools please visit our profitability calculator page.

Value Pricing

Value pricing means charging a lower price for a higher quality offering. It doesn’t mean simply reducing profit margins and charging less. It means structuring the company’s operations to become a low-cost producer without sacrificing quality, enabling the company to reduce prices significantly and attract more value-conscious customers.

An important type of value pricing called “everyday low pricing” occurs at the retail level. This contrasts having temporary discounts on a regular basis after which the price is raised again. Walmart is an example of a company that deploys this pricing strategy successfully.

Perceived-Value Pricing

Instead of using costs to set price, consumer’s perception of the product’s value is used. Market research is required to determine customer perception. If your product is more durable, reliable, or you offer better service and you can communicate this to the market, a higher price may be charged successfully. Basing price on the consumer’s perceived value is a more sophisticated pricing technique that can lead to better performance.

Cost analysis is still important to determine whether what you can charge for the product will cover costs, however costs are not the driving force for price with this pricing technique.

Going-Rate Pricing

Going-rate pricing means basing prices mainly on those of the competition. It’s a popular pricing method especially when costs are hard to measure an the response of competition is unpredictable. Smaller firms will often change their pricing to match or be slightly less than the market leaders. For example, smaller gasoline retailers often set prices based on those of the major oil companies.

The above pricing methods are useful for narrowing down the final price range. There are other factors to consider, including consumer psychology, advertising and quality.

Consumer Psychology & Pricing

Consumers often use price as an indicator of product quality. This is especially true if other information about the quality of the product is not available. When alternative information about the true quality of a product is available, price becomes less important as an indicator of quality.

As mentioned earlier, demand for some types of “high-status” products such as perfume can actually increase with price.

Many believe that using a price that ends with an odd number such as $39.99 conveys the notion of a bargain or that the consumer sees the product in the $30 dollar range rather than the $40 range. However, if the goal is to convey a “high-price image” rather than a “low-price image”, it’s better to avoid using odd-ending numbers.

The Influence of Advertising and Quality

A study by Reibstein and Farris examined the relationship between price, quality, and advertising. They found that:

• Brands with average relative quality but high relative advertising budgets were able to charge higher prices. Perhaps unsurprisingly, consumers seem to be willing to pay more for known products compared to unknown products
• Brands with the lowest quality and lowest advertising expenditures charged the lowest prices. The inverse was also true – brands with the highest quality and the most advertising expenditures obtained the highest price
• This positive relationship between high prices and high advertising expenditures were the strongest for products from market leaders that were late in their life cycle

What price point should you set for your products and services? This important and common question can better be answered by determining company objectives. Several common company objectives are:

• Survival
• Maximize current profits
• Increase market share
• “Skim” the market
• Seek “product-quality leadership”

Survival: Companies facing new and intense competition, over capacity, or changing consumer behavior may pursue a survival strategy. Survival is clearly a short run objective to make it through tough times. As long as price exceeds variable costs and covers some fixed costs, the company can carry on. In the long run, the company must adapt and find ways to add value.

Maximize current profits: Maximizing current profit is a common company objective. To do so, costs and consumer demand have to be estimated for different prices. The price point that generates the highest profit is then chosen. In practice, it’s not always easy to estimate demand accurately (we discuss ways to do this in our article about determining demand and calculating costs). Additionally, focusing on current profits may mean reducing long run company performance.

Increase market share: A company may pursue an objective of increasing or maximizing market share. This makes sense especially if a company feels it can achieve lower unit costs with higher volumes, thereby increasing long-term profit. Many companies set a low initial price to achieve market penetration. This strategy can be advantageous in industries with consumers that are price sensitive, sales and production costs fall with production experience, and where a low price discourages the entry of possible competitors.

Skim the market: “Skimming” means setting high prices initially to target those that are willing to pay the high price, and then gradually lowering the price to attract the more price sensitive customers. Video game and other software producers often use this strategy. Die-hard fans are willing to pay the higher initial price, and as sales decline, the company reduces the price for more casual users. Intel is another prime example a company that successfully uses price skimming. It’s latest computer chips are sold to those who can’t wait for well over $1000 initially. A year later, the price drops and there is a new and more powerful $1000+ chip released.

Product-quality leadership: Companies that produce high quality products relative to the competition often try to position themselves as the product-quality leader. They charge more, but convince the customer that it’s worth it because of the superior product experience, reliability, or other quality related benefits. Price sensitive customers need to be convinced that the higher price is worth it in the long run.

The main point is that using price as a strategic tool is better than simply letting costs determine price. If your product is superior to the competition, you’ll be more profitable if you convey that to the market and charge a higher price.

For information on some common pricing techniques and when you’d use them, see our article about setting prices.

Product Demand

Different prices for a product result in different levels of consumer demand. Assuming consumers are rational, increasing the price of a product results in a decrease in the number of consumers who are willing to pay that price. In other words demand decreases when price increases. Of course, the world is not a rational place and there are situations where increasing price can increase consumer demand. In the case of some prestige goods like perfume and luxury cars, demand has been shown to sometimes increase when prices were increased. However, in the case of what economists call “normal goods”, price increases tend to cause decreases in demand.

We can’t escape a small amount of jargon here. A measure of just how much demand changes with price is called “elasticity of demand”. If a product’s demand for a product changes a lot with price, demand is said to be elastic. If demand does not change too much with price, demand is said to be inelastic.

Examples of products for which demand is relatively inelastic in the short term include gasoline and cigarettes. This is because it’s difficult to find substitutes for gasoline to fuel most cars and for smokers to quit, especially in the short run. Products for which demand is relatively elastic include soft drinks such as Coca Cola and Mountain Dew.

For those who prefer visual representations of elastic an inelastic demand, please see the “demand curves” graph below. In case 1, demand is inelastic, so changes in price result in small changes in demand. In case 2, changes in price result in larger changes in demand.

In the book “The Strategy and Tactics of Pricing”, Thomas Nagle and Reed Holden outline factors that influence a buyer’s sensitivity to price. Buyers are less sensitive to price when:

• They are less aware of product substitutes

• They are less can’t easily compare the quality of product substitutes
• The product is distinct or unique
• The lower the price is as a percentage of total income
• Part of the cost is borne by another party
• The product is used in conjunction with assets bought previously
• The product is assumed to have more prestige, quality or exclusiveness
• They cannot store the product

Estimating Product Demand

Some companies statistically analyze previous prices, quantities sold, and other factors to estimate their relationships. A second approach (more feasible for most smaller businesses) is to experiment with prices. A temporary sale can be used to see if demand, sales, and profit increase. If so, the lower price can later be adopted as the permanent price.

When experimenting with prices, it’s important to keep other factors constant so as to be sure that price is the main variable. Equally important is keeping an eye on competition to see if there have been responses as this will affect demand as well.

Estimating Costs

Companies have to charge a price that will cover their costs in the long run. Otherwise bankruptcy is inevitable. To determine a product’s cost, it’s helpful to break up the cost up into two parts. Costs that vary with the amount of product produced, and those that stay fixed regardless of how many are produced.

Variable Costs
Costs that vary with production levels are called “variable costs”. For example, Ford uses materials like metal and plastic to build cars. The more cars Ford builds, the more metal and plastic it needs to pay for.

Fixed Costs
Costs that remain fixed in the short run are called “fixed costs”. Examples of fixed costs are rent, insurance, and equipment. (All costs are variable in the long run.)

Total Cost
Total cost is simply the sum of all variable costs and all fixed costs for a given level of production. The average cost of the product is the total cost divided by the number of units.

By determining fixed and variable costs, a “breakeven point” can be found. The breakeven point is the number of sales at a given price required to cover all fixed and variable costs. For more information on calculating break-even points and profitability, please refer to our profitability calculator page.

95% of your unhappy customers will never complain. They feel that complaining isn’t worth their effort, or they don’t know how, or to whom to complain.

Listen to Your Unsatisfied Customers Carefully

It’s essential to listen to customers who complain. Listening closely lets you fix any underlying problems with your business process, so that other customers don’t run into the same issues. Additionally, if the problem is resolved, your customers won’t badmouth your company to others.

Develop a System to Resolve Complaints Promptly

Customers whose complaints are satisfactorily resolved often become even more company-loyal than customers who were never unhappy.

What you can do:

• Encourage your customers to complain!
• Develop a systematic approach for addressing service failures
• Train employees to properly handle complaints and provide customers with compensation for failures
• Remove barriers that make it difficult for customers to complain. Examples include providing phone numbers and links to contact forms on your website
• Keep customer and product databases so that you can analyze the types and sources of complaints so that you can continuously adjust your policies

Make Sure Your Employees are Happy

Employee relations will affect customer relations. It’s harder to get disgruntled employees to go the extra mile for your customers. Conduct regular audits on employee job satisfaction, listen to their complaints and encourage two-way communication.