Saturday, January 18, 2014

Pricing Strategies

One of the finer things in our business is to decide on the price of a product. Since we manufacture our own products, there are various costs that one incurs in a product. Following are some of the key ones :

1) Labour Costs : Our products for the most part are handmade and we at KraftInn have artisans as employees who come from remote villages. Apart from monthly salaries, we also provide housing and food to our employees - which helps the artisans to send money home to sustain their families. Bamboo craft is an extremely skill intensive craft and finding the right artisan and retaining is one of our key goals.

2) Logistics Costs : Since we primarily sell online, one important aspect is the logistics costs that we incur - this includes packaging material and payments we make to our Courier partners and India Post.

3) Marketing Costs : Any business that seeks to sell products to its customers incurs marketing costs. In our case, these are related to branding and advertisements that we do to help take our products to customers

4) Operational Costs : These include costs related to production of items, rent, electricity, treatment, machines etc

5) Raw Material Costs : The raw material, which is primarily Bamboo and Water Hyacinth, in our case.

6) Commissions : Third party commissions, payment gateway transaction cost etc.

So the conventional wisdom for deriving the price of a product is to add a weighted average of the above to come with a price that leaves room for a minimum profit. This was our very first strategy when we started out but slowly we realised that it really does not matter if our costs are high or low for  particular product but what is more important is if the customer finds value in our product. That is when we thought of what we call a minimum viable price. The idea is the following :

Value : Customers like to pay for the value they get. So, regardless of whether a product is big or small and incurs X cost for labour and Y cost, the customer should feel that there is enough value for what he or she pays. We get extensive feedback through channels like our Ebay page and have derived some insight into what is the right price at which customers see value. After that price is discovered, we slowly tune the cost parameters - example the size of product to make it viable. A good example is our set of laundry baskets - Putting two laundry baskets of slightly different sizes makes it possible for us to package it together in such a way that we save on logistics cost and pass the value to our customer.

Discounts : A friend of ours said in jest that she would buy the same product at Rs 250 with 50 percent discount rather than at Rs 100 because that is how strong the perception of discounts is in India. We however thought it wise to have a minimum viable price rather than pricing it higher and then offering discounts. This also helps us to keep our price uniform across all our channels be it our website or Ebay and KraftInn.

Economy of Scale : As a business grows, it is able to bring in more and more productivity and efficiency and this helps to bring down costs. As a small business, we know that over time, we will be able to optimise better on our costs. But, this does not mean that we need to pass all our costs to our customers. At this moment, we are looking at minimum viable price from a customer stand point and the idea is to focus on growth where over a period of time, the economies of scale will enable us to put the financial model that will help us sustain a large number of artisans while keeping the minimum viable price attractive for our customers.

    That's all for today. Thanks for reading.


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  3. Hi we do Interior Designer works in Hyderabad and your blog has been very helpful to us. The pricing strategies that you discussed are really good and it has helped us in our interior design works. Thanks a lot and keep up the good work.

  4. How true.. My husband always likes to buy things of highest discount rather than if the product is worth it after discount or not. These days I've stopped looking at discount altogether - I just end up buying unnecessary stuff in discounts. Thanks,Preethi.

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