As a product moves through the distribution channels, e.g. from manufacturer to distributor to dealer to customer, there are prices set along the way. The manufacturer’s selling price to the distributor becomes the distributor’s cost. Obviously, it is important to understand pricing and margins along the distribution path. Ultimately, the price to the consumer must be competitive. Who sets this price? Does the manufacturer or the dealer have the final say? Can the manufacturer in any way control the price of his product when it hits the street? Most importantly, can the manufacturer make (or sub-contract) the product for a cost to him that allows him to meet his profit objectives given the retail price target?

How do you price a very innovative, one-of-a-kind product? Are you pricing too low and leaving money on the table? Are you pricing yourself out of the market? Presently, there is strong demand for Harley-Davidson motorcycles and delivery times are running over six months. Since only the Harley company makes a Harley, should it raise prices and take advantage of the strong demand? If demand for your product is lagging, should you drop price – especially if the product life cycle has peaked?

There are various pricing strategies. For example, markup pricing is the setting of a price based on one’s cost. This may be appropriate when reselling a product used in providing a service. For example, an auto mechanic may mark up her cost of auto parts by 50%. This may be a simple way for her to determine selling price and from her experience this is in line with what other mechanics are doing.

Another pricing strategy is that of market «skimming». You start with fairly high prices (especially in the absence of competition) and you lower your prices over time as you start to keep up with the demand or as competition begins to move in.

For so-called commodity products, a going-rate pricing approach is often followed. If you are selling gasoline to motorists, it would be very difficult to charge a price per liter which is noticeably different from that charged by gas stations nearby, unless you’re the only station on a 200 km stretch of desert highway.

Currency is another important aspect for technology companies to consider. Because the markets for technology-based products are usually global, you should price your products in U.S. dollars. You might even consider pricing on an FOB (Free-on-Board) Destination basis. When I was selling video terminals in Germany in the 1970s, I priced in Deutschmarks, FOB Frankfurt. This meant that I was taking more risk with respect to currency fluctuations, freight and insurance charges, but by consolidating large volumes to Frankfurt, I was able to greatly reduce air freight expenses thereby offering a competitive price to my distributors.

Placement of the product is crucial. There are often many channels, which a product can take in going from your shop to the customer. Defining a channel strategy is not simply an arbitrary matter. Bear in mind that all middlemen along the way are in partnership with you to sell something to the end-user. Therefore, your product and its other 3 Ps must be such that various resellers in your channel have their needs (e.g. margin objectives, volumes) met.

There is also the question of control. When AES Data launched the world’s first word processor in the early 1970s, it signed up the Lanier company in the USA to handle U.S. sales. However, Lanier was selling the AES product under its own label, and when Lanier decided to switch to another supplier of word processors (as competition emerged), AES had little control over its U.S. customers. To gain a foothold in the U.S. market, it had to start from the beginning in a market which it created! Even if Lanier sold the AES products under the AES name, the channel would still be owned by Lanier in that Lanier had its own loyal customer base along with sales and service offices to support this customer base.