Since it’s the middle of the summer in Tennessee with temperatures hitting the mid 90 degrees, I sometimes take my twins to the mall play place. It’s not my favorite place to go due to the chaos of running, screaming, and crazy kids in a confined space, but I manage. I have not taken the twins to the mall in several months. Unfortunately for my pocketbook, they discovered Build-A-Bear Workshop as we were leaving the mall. I let them look around for a few minutes but told them they would have to wait until their birthday if they wanted to buy a stuffed animal.
The boys were in awe of the different animals, the clothes and accessories, the stuffing machine, and even the hearts. Of course, you know I was calculating the cost. If I gave in today, I’d be looking at $100 easily for two stuffed animals. Just the animals were $20 each minimum. And then I’d be telling them that I never got a $40 stuffed bear. They are $10 at Walmart or $1 at Dollar Tree and that we already have too many stuffed animals at home.
Why would I even consider paying $40 for a bear and accessories? Well, this store offers unique experiences for kids. The kids pick out the animal, pick out clothes, go to the washing station and bathe their animals, brush the fur, and make a wish on the hearts before the bears are stuffed to your preference. Customers can even buy music discs, record personalized messages, and special scents to place inside the animals. The kids get a birth certificate to take home and a nice box too. It’s an “experience” for kids. That’s why this company can charge more money for a stuffed animal.
When looking at your own business, how do you determine the price of a brand new product on the market? There are several items to consider for pricing strategies. As a product manager or entrepreneur, you want to price the product for the highest profit potential in conjunction with realistic sales.
Let’s use Build-A-Bear as an example for pricing strategies. Pricing strategies can be based on cost or value. Cost based means that companies calculate the cost to produce the product or service and then add a designate mark up. The mark up can be a percentage (example 10% or 50%), or a fixed amount, like $20 or $1,000. The pricing strategy will usually depend on the industry and the market.
Example 1: Cost-based strategy: Mark up as a percentage
$5 cost + $1 (20% mark up) = $6 price to consumers
Example 2: Cost-based strategy: Mark up as a fixed amount
$5 cost + $5 (fixed) = $10 price to consumers
I’m going to guess that Build-A-Bear does not use the cost-based pricing strategies but relies on value-based pricing strategies. Value-based pricing strategies are those that depend on how much the consumers are willing to pay for a product based on perceived value. If the product is newand has significant value and appeal to consumers, then entrepreneurs can charge based on how much they think customers are willing to pay for the product. Build-A-Bear charges at least $20 for a stuffed animal, plus accessories, for an estimated average ticket price of $40 – $50. Because consumers are willing to pay for the experience of building their own bears, Build-A-Bear uses the value-based pricing strategy.
Let’s use the same numbers for simplicity.
Example 3: Value-based strategy: Mark up + market value
$5 cost + $35 (market value) = $40 price consumers are willing to pay
In summary, the pricing strartegy should include the highest profit potential for the business with realistic sales. So, Build-A-Bear will charge consumers $40 or more for the stuffed animals with a $35 profit for the highest profit potential for their business.
There are also other items to consider when pricing, such as the price to quality relationship, consumer signals, and promotions. If you want to listen to this 15 minute mini class on Pricing Strategies for New Products, click here to watch the YouTube video. Feel free to share with your social media too!