It’s not a good idea to just differentiate on price, according to Teradata CTO, Stephen Brobst who spoke about the importance of pricing and innovation at the Teradata Summit in Sydney.
When it comes to pricing a new product, the first option is a mathematical way that takes the cost of R&D, manufacturing, distribution and marketing into account.
“Shareholders also expect a certain value, so that’s the margin I add on top of the cost,” Brobst said.
In this case, price equals cost plus target margin, though Brobst said it is not a good way to maximise the profitability of my product.
“It is a very rational way to think about pricing but it has zero relationship to maximise profitability,” he said.
“It may help you understand the lowest price you are willing to enter the market, under which you should not launch the product, but not for maxising profitability.”
Aiming for premium
The second option for pricing is to look at the other competitors in the marketplace, take the lowest price competitor and undercut them.
Brobst said this approach means a company is not taking any value from the innovation they have created for their product.
“Competing only on price is the death spiral for your business unless you have some built in competitive advantage that allows you to deliver a lower cost product than your competitor,” he said.
Another approach is to go in the next direction and price ten per cent higher than the nearest competition.
In that case, the 10 per cent premium is meant to represent the value add of the innovation that a company has created for the product.
For certain products such as fashion and wine, Brobst said a higher price creates demand.
“There is a perception of quality that is associated with the price,” he said.
Brobst said this approach does not work with commodity products, as they are easier to compare and choose between.
Patrick Budmar covers consumer and enterprise technology breaking news for IDG Communications. Follow Patrick on Twitter at @patrick_budmar.