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Additional Praise for
Setting Profitable Prices
“You only need this workbook if you want to make more
money.”
—William M. Turnoff, CPA
“This workbook presents a fast way for entrepreneurs to set
prices that will increase their chances for success. Entrepreneurs
can’t afford to leave money on the table, and the step-by-step
models in this book will help prevent just that. Dr. Jensen runs
a nano-incubator for new businesses at our Center. Now you
can have her practical, easy-to-follow advice on pricing for your
own new products or services.”
—Dr. Cori Myers, Director, Haven Entrepreneurial
Leadership Center
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“This is great! Finally a practical user-friendly guide to pricing
that I can use with my clients and students. The worksheets are
valuable analytical tools that yield straightforward results that are
easy to understand. We needed this!”
—Mary Anne Holley, Entrepreneurship Professor,
Baruch College, CUNY
“I wish I had been able to use this workbook when I started my
first business years ago. I’m sure I could have made more money!
Reading this book is just as important as developing a sound
business plan. I will definitely use her concepts in my courses
on marketing.”
—Donna Coehelo, Marketing Professor, WCSU
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SETTING PROFITABLE PRICES
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SETTING PROFITABLE PRICES
A Step-by-Step Guide to Pricing Strategy—
Without Hiring a Consultant
Marlene Jensen
John Wiley & Sons, Inc.
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Cover image: © iStock Photo/RUSM
Cover design: Paul McCarthy
Copyright © 2013 by Marlene Jensen. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic,
mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States
Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy
fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750–8400, fax (978) 646–8600, or on the
Web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley &
Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748–6011, fax (201) 748–6008, or online at www.wiley.com/go/permissions.
Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no
representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied
warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written
sales materials. The advice and strategies contained herein may not be suitable for your situation.You should consult with a professional
where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not
limited to special, incidental, consequential, or other damages.
For general information on our other products and services or for technical support, please contact our Customer Care Department within
the United States at (800) 762–2974, outside the United States at (317) 572–3993, or fax (317) 572–4002.
Wiley publishes in a variety of print and electronic formats and by print-on-demand. Some material included with standard print versions
of this book may not be included in e-books or in print-on-demand. If this book refers to media such as a CD or DVD that is not included
in the version you purchased, you may download this material at booksupport.wiley.com. For more information about Wiley products,
visit www.wiley.com.
Library of Congress Cataloging-in-Publication Data:
Jensen, Marlene.
Setting profitable prices : a step-by-step guide to pricing strategy—without hiring a consultant/Marlene Jensen.
p. cm.
Includes bibliographical references and index.
ISBN 978-1-118-43076-7 (paper/website); 978-1-118-50266-2 (ebk); 978-1-118-50245-7 (ebk); 978-1-118-50273-0 (ebk)
1. Pricing. I. Title.
HF5416.5. J46 2013
658.8'16—dc23
2012037688
Printed in the United States of America.
10 9 8 7 6 5 4 3 2 1
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Dedication
This book is dedicated to my brother Harold Fann (1954–2008).
In 2005 we launched a two-person e-book company, where I did the marketing and he
did the design (books and web sites).
Our first book—No-Cost Home Business Startup Plan—failed spectacularly, but
when I switched to writing e-books about pricing and Harold wrote e-books about web
site design, our company flourished.
After his surprise death from a heart attack, I learned how much of the enthusiasm and
love I felt for the company was really enthusiasm for working with him and love for him.
I still miss him terribly.
I thank him for getting me started writing about pricing—and for making it fun!
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Contents
Preface
xv
Author Credentials
xv
If You Can Afford a Pricing Consultant . . .
xvi
Don’t Have the Cash to Invest?
xvii
How Big of a Rush Are You In?
xvii
Chapter Summaries
xviii
Acknowledgments
xxi
PART 1
HOW TO SET PRICES FOR MAXIMUM PROFITS
1
Chapter 1
Why Pricing Is the Key to Your Success
3
Raise Prices—or Sell More Products?
3
Big-Company Case History
5
Tiny-Company Case History
5
ix
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x
Chapter 2
Why Most Companies Stink at Pricing
(and How You Can Do Better!)
7
The “Myth” of Creating Demand Curves
8
How Your Competitors Are Setting Prices
9
Cost-Plus Pricing
9
Match-Your-Competitors Pricing
11
PART 2
HOW THE MARKET WILL VALUE YOUR NEW PRODUCT
13
Chapter 3
Analyzing Your Competitors’ Prices
15
You Do So Have Competitors!
15
How to “Pick” Your Competitors
16
Direct vs. Indirect Competitors
16
How Consumers Evaluate Prices
18
How to Get Profitable Ideas from Your Competitors
19
Environmental Factors That Can Affect Your Pricing
21
Environmental Factors Overview
21
The Economy
21
Competitors
24
Government Regulation and Legal
24
Social Trends
25
Technological Change
26
Chapter 4
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Contents
Chapter 5
Pick the Positioning of Your New Product
29
There Are Only 3 Choices!
29
The Psychology of Price Positioning
30
Penetration Price Positioning
31
Skimming (or Premium) Price Positioning
35
Competitive Price Positioning
38
Learning More about Competitive Pricing
40
Analyzing Your Buyer Benefits/Drawbacks Relative to Your Competitors
43
Uncovering What Buyers Really Value/Hate about Products in Your Marketplace
44
Learn More about Calculating Buyer Valuation of Different Features
44
Picking a “Ballpark” for Your Best Price
47
You Will Not Be “Stuck” with Your Decision!
48
Can’t Make a Profit at that Price Range?
49
Not Sure about Your Results?
49
Learn More about Buyers’ Reactions to Price Ranges
50
PART 3
YOUR COST ANALYSIS
53
Chapter 8
Evaluating Your Costs
55
The Ideas Behind “Target Costing” and “Target Engineering”
55
Types of Costs
56
The Hardest Part of Calculating Costs
57
Reasons for Launching a Product that Doesn’t Cover Overhead
58
Chapter 6
Chapter 7
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xii
Contents
PART 4
FINE-TUNING YOUR PRICE
59
Chapter 9
Is Your Profit Potential Acceptable?
61
If You’re Happy with Your Potential Profits
61
If You’re Not Happy with Your Potential Profits
62
Next Step
66
Chapter 10 Psychological Adjustments to Your Price
PART 5
Understanding “Barriers” in Prices
68
Staying below Barriers
68
Increasing Prices up to Barriers
69
Numbers that Say “Discount” to Buyers
70
Test Your Knowledge!
71
Visually Appealing Prices
72
Selling to Businesses
73
Learn More about Thresholds
74
Learn More about the Effect of Numbers
75
TESTING YOUR PRICES
77
Chapter 11 Testing Prices
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67
79
The Psychology of You—in Setting Prices
79
Can You Test?
81
The Difference between Testing and Research
81
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Contents
xiii
Chapter 12 Using Google to Test Prices for Free (or Almost Free)
83
PART 6
Two Methods for Almost-Free Testing!!
83
Using Google Optimizer to Test Multiple Things
87
PRICING IN SPECIAL SITUATIONS
91
Chapter 13 Pricing Services
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93
Imagine No Chapter 13!
93
The Complications of Setting Prices for Services
94
The Myth of Pricing Based on “What You Want to Earn”
94
Pricing by the Hours versus the Job
94
Finding What Service Competitors Charge
96
Picking Your Price Positioning
97
What Your Price Says about Your Firm
97
How to Charge Higher Prices to Those Willing to Pay More
98
Chapter 14 Pricing New Products/Services, Part 1: When Your Brand Is Unknown
101
The Problems in Pricing Something New
101
Price Equals Quality Buyer Perception
102
Does Quality Equal Likelihood-to-Buy?
102
Understanding “Bargain Hunters”
103
Price Preferences by Product Type
103
Detailed Research on Buyer Price Position Preferences
104
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