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The Incentive Behind Pricing - Brooding on Matters | Travis Todd | Brooding on Matters | Travis Todd

The Incentive Behind Pricing

Posted on 17 September 2009

I recently wrote an article about pricing, markups, and margins and thought I could go a little further in depth on the importance of the topic – in a little less technical fashion.  I can’t count the number of times as a child growing up I came up with an idea for a product.  Growing up through a number of Wyoming winters I hated the fact that you had to scrape ice off your windshield and that your windshield wipers got frozen to the windshield, it just didn’t seem like that hard of a problem to fix.

I assumed that if my product could sell it for X and I could build it for Y, and X > Y, then I had it made.  At the time I didn’t give the first thought to distribution and sales, I guess I figured that would take care of itself.  It was also prior to public availability to the internet which changes the discussion, but for now we will live in the brick and mortar world.

Let’s say that you are an entreprenuer and you have developed a “better mousetrap” that you want to sell on the shelf of hardware stores across the nation.  You are able to manufacture and produce the product, but you don’t have the ability to get it in stores across the country.  So, you take your product to a wholesaler and ask them to distribute (or carry) your product.  Sounds like a great idea, what price are you going to sell it at?

Now let me ask a couple questions:

  1. Presuming the wholesaler agrees to carry the product why would she be more inclined to sell your better mouse trap over the standard trap?
  2. When she does sell it to the retailer (hardware stores) what is to get the store manager to place your product on the top shelf near the front of the store as opposed to the dusty bottom shelf in the back of the store?
Incentive

Incentive

The answer to these questions is INCENTIVE, and in the retail world incentive is a close relative to margin.  What’s In It For Me…

The liquor industry is probably one of the more prominent industries, or the one that drives the expressions around pricing.  You’ve heard of “Top Shelf Liquor” and “Well Liquor”.  One product sits behind the bar on the top shelf in a shiny bottle for the world to see and purchase, the other product sits underneath the bar hidden away.  Similarly in the liquor store, look at the brands that sit on the top shelf versus the bottom shelf.  Additionaly look that the store displays that you see when you walk in enticing you to purchase, are they ever for the bottom shelf product?  The price, and in most cases the distributor/retailer margin vary substantially for the two different products (just because it’s a higher price doesn’t necesserily mean its a higher margin but most likely).  I’ll avoid a thorough discussion on product placement other than to say that one of the underlying themes is to place your higher margin and higher volume items in the front of the store near the cash register – as almost everyone walks by that area.

So, back to your mousetrap.  You now understand that you want your mousetrap near the front of the store on the top shelf, and you would like your wholesaler from time to time promoting your product with store displays, right?  Hopefully you answered yes, thus you must price your product accordingly so that there is incentive (margin) for your wholesaler and retailers.  Now that isn’t always easy, as there is probably a sweet spot that the product must retail at to maximize revenue, additionaly you must consider where your competition is priced at.  In Pricing, Markups, Margins and Mass Confusion I talk about how to work backwards from retail price to get to retail markup, wholesale markup, to eventually your markup.  Go in and talk to some retailers and find out what their average margin is for your competitors product and likewise do the same with the wholesaler.  It then becomes a business decisions to see if you can give them a little larger slice of the pie (and how much of a slice does it take to make a difference) to help move your product.


5 responses to The Incentive Behind Pricing

  • […] does it matter, well product pricing is a very important aspect of entrepreneurship and running a business, and probably a subject that a lot of people […]

  • […] and is listed in Recalls. … Warren Emergency Food Shelf is a co-operative effort in the Warren …The Incentive Behind Pricing | Brooding on Matters | Travis TI recently wrote an article about pricing, markups, and margins and thought I could go a little […]

  • francesco says:

    Do you think the listing fees would work well? Or maybe is better to offer some cases or products for free?
    In both cases I feel as I could simply give a simple discount on the price instead of saying my price and than proposing a listing fee which is money the same.
    I’d prefer where is possible to make demostrations for the clients: so it will consists in paying the retail shop’s owner for the disturb and invest some money in products to offer them to the clients in the shop.
    What about it, any other ideas?

  • Travis B says:

    Hey Travis. First off, nice name! I juat stumbled onto your site and more to the point, this article (and the last in this series). I was just wandering if you ever did anything about your ideas for business. Especially about the liquor industry. It’s been a few years since you wrote this so I’m either assuming you did it or moved on. I’m building a business plan at the moment for a liquor company and would like to just get in touch with you. If not that’s cool. Let me know

    – “fellow” Travis

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