The Price That's Right

  |  January 25, 2000   |  Comments

The direct marketing experts at the "Billion Dollar Internet Strategy Setting Super Summit" knocked Dana on his tokhes last week. Martin Chenard of Advanced Business Strategies gave him the secret to profits, the E=MC squared of business. How do you set a price? You ask your prospects, then do some math. And the price you charge has little to do with production costs. It has to do with what people believe your product is worth, and your reaction to that perception.

Jay Abraham comes from the direct marketing business, so he doesn't know how bright he is about the web.

It turns out the insights of his old business are incredibly relevant to the new industry. While I'd heard such great web marketing speakers as Jakob Nielsen, Ken Evoy and Rob Frankel before, it was the direct marketing experts at Abraham's "Billion Dollar Internet Strategy Setting Super Summit" last week who knocked me on my tokhes. (That's Yiddish for where you sit.)

My "Paul on the road to Damascus" revelation (that's for the Christians among you) came from Martin Chenard, who runs Advanced Business Strategies Inc. Chenard didn't have a laptop - he had overhead slides. He wasn't a dynamic speaker - his flat monotone (and the late afternoon time slot) had some heads nodding. If you can imagine a series of motivational lectures interrupted by a rocket scientist you have the idea.

Yet this quiet, professorial man was, for me, an Imam, a Buddha if you will, who gave me the secret to profits, the E=MC squared of business. He told me how you set a price.

You ask your prospects, then do some math.

You can calculate your price by getting just 40-50 people to complete a form Chenard created through decades of research.

When Chenard conducts this research for his clients, the form describes the client's product, then asks at what price this would be a bargain, what price would be high but fair, what price would be too high.

Below that, the form gauges the respondent's interest in the product - gotta have it, would love it at the right price, could be persuaded, etc. When you put codes on the forms so you can identify who filled them out, you can then quickly sell the "gotta have it" crowd and probably pay for the study.

Once you have your sample (and you do this exercise throughout the product's life cycle, as it moves up the s-curve from introduction to maturity), everything else is math. You can know what price would gain the most revenue, which the most profit, and which the most market share. You can find your retail price and your sale price.

Chenard's math has matched growth curves to profit curves so you can price strategically. Using the history of fax machines, he described how you protect your retail price (with strategic discounts) until two-thirds of the market own the product. At that point stock buyers should be looking for the exit because margins will come under pressure, you absolutely must innovate (and find the next product), and the mature replacement market kicks in.

How you use the results of the research, in other words, will change as the market matures. You want early market share, you want profit as you climb the s-curve, you have to deal with competitors and their prices, and it's always a moving target.

Notice what's not here. Production costs aren't here, for one thing. The price you charge has little to do with production costs. It has to do with what people believe your product is worth, and your reaction to that perception.

This is the kind of knowledge that the real world (as opposed to the Internet's virtual world) has had for years. It's now flooding in. Don't be suspicious - use it.

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Dana Blankenhorn

Dana Blankenhorn has been a business reporter for more than 20 years. He has written parts of five books and currently contributes to Advertising Age, Business Marketing, NetMarketing, the Chicago Tribune, Boardwatch, CLEC Magazine, and other publications. His own newsletter, A-Clue.Com, is published weekly.

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