New Product Pricing Strategies
Critical to Continued Business
Direct Sales Journal
by Michael L. Sheffield
CEO The Sheffield Group
Direct Sales and Multi-Level Marketing (MLM) Companies are strongly product dependent. In fact, product is king and customers and distributors expect the best. This is why wise MLM corporate leaders make sure their products deliver what their promotional materials promise and do it at a fair price. It is just common sense. But what is a fair price?
One of the most common questions asked by my clients preparing to launch new Multi-Level Marketing products is "How do we determine retail price?" The best place to start is by comparing your product with something similar in the market place. If there is a similar product, it's okay to price your product higher as long as you can validate that it is really worth more. Your product must be perceived as being of superior value and performance to over-the-counter retail products as well as to direct selling competitors. You must show that your product is unique or has some feature that can't be easily duplicated. You can command a higher price if your product stands alone and can't be found anywhere else.
Of course, matching the suggested retail price of a new product to the customer's perceived value, is a critical issue. Making sure your product is fairly priced is good business no matter what your product or industry. But direct selling companies have an equally important issue to be addressed regarding their approach to product pricing: their company's compensation plan.
It's a good idea to determine the price of your product prior to ever developing the compensation plan. The reason is simple. Your compensation plan provides the money motivation for your distributors. It keeps them selling. It keeps them sponsoring others into your business opportunity.
Pricing a product too low can be just as dangerous as pricing it too high. Pricing too low cuts into the company's bottom line making overall profitability minimal. In this case, high volume becomes critical. Building large monthly distributor sales volume of a low-profit item or significant retention of ongoing customer reorders is needed to compensate for the low margin per unit.
Prices set too low will affect the salesperson's ability to earn sufficient profit margins to adequately compensate them for their sales and marketing efforts. They're on the phone, on the Internet or pounding the street, working hard, making sales. But because their product is priced too low, they can't make enough money to make it worth their time.
As a present or prospective direct sales company owner, you must understand the needs of your independent distributors. Unlike a retailer who puts the product on the shelf and allows the packaging and brand advertising to do the sales work, an MLM product must be explained and perhaps demonstrated. That is what your distributors do. It involves considerable effort. Your distributors must feel that there is profit enough to justify their investment of time and energy. If your product is new and unique, don't make the mistake of pricing too low. You can always lower the price of a product if necessary but raising the price too early in the game can be disastrous. It is important to note that in this industry, you can't win trying to be the low cost provider. There is always someone who will try to under price you.
Since you are not competing on the retail shelf with other similar products, maintaining a pricing strategy that supports a lucrative commission structure, as long as it is perceived as fair, will also enhance the perceived value of the product. Again, it always goes back to customer perception. Think of it this way: If you were going up in the Space Shuttle, how comfortable would you be knowing that the space craft had been built by the lowest bidder?
Here's another danger of pricing too low. If you are forced to raise the price, you risk losing your retail customer as well as your distributor.
Since many of these distributors are novice business people, they simply don't understand that by raising the price you are trying to correct an honest mistake in your pricing strategy. Instead, they will likely perceive you as greedy. I'm not saying their assessment is fair; it's just the way people perceive their own situation.
Remember that your costs include more than just product and packaging. There are marketing costs associated with the actual selling of the product as well as promotional and advertising costs. In the past it was assumed that these costs were replaced by using the independent distributor to take the product directly to the customer, but today, sales aids, support systems and brand-name building are commonly used to enhance the distributors performance. It could involve methods such as the production of video or audio tapes for distributor and direct mail distribution, as well as a strong e-commerce system to support your sales people. The Internet is reshaping the way every company and its independent distributors view corporate marketing support responsibilities. In the end, it is not the successful methods of the past but the techniques used by your competition that dictates your marketing methods and distributor support systems.
You are not only competing for product market share but also for your distributor's time. Part-time MLM distributors look for opportunities where their time can be leveraged. Certainly they should love and believe in the products. But you must realize that if they joined your business to make money, you must show them that every hour spent in selling is best spent with your company. Independent MLM distributors now expect their company to provide substantial support and marketing tools. As a result, many companies are combining direct sales with time tested and proven traditional marketing methods accelerating their company and distributor growth. It is important to accommodate the extra cost involved when formulating your distributor compensation plan. Remember, pricing your product or service too low can be your greatest handicap when you must financially motivate a sales organization.
While it is dangerous to price a product too high, it's certainly safer than pricing it too low. When you find your cost is a little too steep, you can quickly adjust it downward. My own formula for pricing strategy is related to whether the product has any serious competition. If it does, then you never want to be more than 10% to 25% higher than your competition — even when you have a superior product.
And while I'm on the subject, keep this in mind: As a direct sales or MLM company, you never want to compete in the area of price. Always compete on the level of quality and benefits. As Multi-Level Marketers, we cannot win a price war. We can only win with quality, a compelling story, and the special benefits that we offer.
When you price a product on the high end, especially if it's "new to the world," a company should take advantage of the higher pricing. Remember, a new-to the-world product is one that is significantly different from anything that's ever been offered. This may be as simple as a new and creative use for an existing product, an improvement on an existing product, or even an improved packaging concept. A product that has some new use could also be considered a new product. For example: Avon's product called Skin So Soft was originally designed as a skin enhancement product. Word of mouth began to indicate that outdoorsmen had discovered it to be a great insect repellent, especially for mosquitoes. Even though this new use increased the potential market, it didn't validate a significant price increase. However, if it had been launched under a new brand name promoting its enhanced benefits over other skin enhancers or insect repellents, it may have warranted a higher price.
If you are introducing a completely new concept, there are no standards for pricing and the sky is the limit to the point of customer resistance.
Pricing this kind of product for maximum profits will provide some windfall financial margins for a while until your competition moves in with their copycat versions. And they will eventually do this. One of the great advantages of new product introductions that is commonly overlooked is this: If you have a new product that has a significant profit margin, you can package it in product systems with other compatible, but perhaps lower profit margin products. This can increase your average sale per customer and balance low margin products to help fit an aggressive distributor compensation plan.
Doing this enables you to market your combined system of products at a lower retail price while still earning profits conducive with your distributor compensation plan strategy. You can end up making money on companion products that don't offer the normal profit margins needed.
I've read numerous books on pricing strategies and talked to marketing professors from some of America's leading universities. I've examined their formulas on product pricing. All this being said, when I am asked for advice on how to price a revolutionary, completely new and difficult-to-duplicate product, I ask: "What would people be willing to pay for this product?" Then I add 25%.
Here is my reasoning: When a product is that new, there is no real point of reference. I don't know what the market will really allow, so I let the customer tell me. In the early stages of capturing product market share, I suggest pushing the price limits. Then we let the customers dictate whether or not they feel the value warrants that price. Remember, if you price your product too high it's easy enough to bring the price down and there are few complaints from customers or distributors. But, if the price is too low, it's extremely difficult to validate that necessary increase.
Michael L. Sheffield is the CEO of The Sheffield Group, a full-service direct sales and multi level marketing (MLM) consulting firm. He is a Co-Founder and Chairman Emeritus of the Multi Level Marketing International Association and in 2001 he was inducted into the MLMIA Hall of Fame. He and the Sheffield team have assisted in hundreds of national and international MLM corporate start-ups as well as offered a full line of services for established direct sales companies including consultation on MLM Website development. As the most noted expert on compensation plans, he has been a guest lecturer on the subject for the DSA, University of Illinois, University of Texas, Berkeley and Harvard Alumni Association. He has helped launch over 200 new products marketed by direct selling companies around the globe. He can be contacted at 480-968-6199, The Sheffield Group, 2239 N. Hayden Road, Suite 103, Scottsdale, AZ. 85257, website address: www.sheffieldnet.com.
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