None of us are perfect and we all make mistakes - come on, even you!! Well, some mistakes can be quickly mended but other mistakes cost us money and when it's your livelihood that's a very serious matter.
Perhaps you overlook the importance of pricing in your business? It's a fact that too few companies proactively manage pricing and their profits suffer as a consequence. Even with the newfound efficiency acquired from using pricing software, there’s one thing your sales team still needs to attract sufficient buyers: a good pricing strategy.
Here are 6 pricing strategy mistakes that could potentially undermine or even ruin your business - and some suggestions about what you should do instead.
You don't review/update your prices often enough
When did you last update your prices – a year or five years ago? This could potentially be disastrous for your business. I suppose your train of thought is that if things are travelling along relatively smoothly why should you rock the boat with a price increase or decrease?
However, have you taken into account rising costs and inflation? At the very minimum you should be re-visiting your prices annually - and when I say minimum I mean minimum. There are many reasons for you to review/increase/decrease your prices on a more regular basis but perhaps the most persuasive reason is that just a 1% increase can have a huge impact on your bottom line.
This could, on average, increase your company's net profits by 12%. You’ll also be surprised at how little a 1% increase in your prices bothers most customers/clients. Don't be scared, if this pricing strategy doesn't produce positive results you can revert to the previous prices.
Do you believe one price is suitable for All your customers?
Do you operate a singular, narrow pricing policy for each of your products? If so you could be leaving money on the table.
“The mistake is to have only one price for your product.” - Nathan Barry
In a recent study in the US, pricing experts ran a test on selling beer. They priced one beer at $1.80 and one at $2.50. 80% opted for the more expensive beer. In this case, the lower priced product only served to emphasise and highlight the quality of the more expensive beer.
To further emphasise the impact of tiered pricing, the researchers ran a second test. This time they introduced a bargain price beer at $1.60. In this test, 80% of customers opted for the $1.80 beer (the middle one). Obviously, this was disastrous for the profit margins.
Finally, the researchers removed the bargain beer and added a ‘super premium’ option at $3.40. In this test, 85% of customers opted for the $2.50 premium option. So, by simply offering more price options, this vendor was making an extra $0.70 (38%) per beer! Not a bad pricing strategy all things considered.
Your prices are always the lowest
Do you believe that if your product or service is priced lower than all your competitors, you’ll get more customers? You are therefore working on the assumption that greater volume means you’ll make more money? I'm afraid this is not always the case.
This pricing strategy only works if you’re selling exactly the same product as your competitors – and I mean exactly the same.
Today’s savvy buyers tend to be sceptical, and the cheaper something is, they become suspicious. Affordability is obviously important but buyers still want value. Instead of comparing your significantly lower prices to the competition, say why your prices are lower. What does your brand do differently that allows you to provide great quality for less?
Are you pricing too high?
Setting prices too high without consideration for target customers or what they value could be a recipe for disaster.
When companies price their products too high, they can make attractive profits on each transaction. However, consumers are keenly aware of the value they get for their money, and once they conclude products are overpriced, they will stop buying. Consumers can have long memories and will be reluctant to trust your company again. Which leads on to ...
You're not selling value
If you present products and services in the right light you can increase conversions. When dealing with pricier products, sell the value rather than just the product itself. Focus on the long-term benefits to the customer and demonstrate how the product or service can create a favourable change in your buyer’s lifestyle.
You don't benchmark your business
Business owners often tend to think of what a product should be worth, not what it actually is worth. It's important to study the market as a whole and even more vital to look at what the product sells for in your immediate area.
Observe your competitors, and think critically about how your model compares to theirs. What volume of business do your competitors do? Is there a reason their product sells for what it does? This is called benchmarking, and a remarkable number of small businesses fail to utilise this strategy at their peril!
Your business should establish the appropriate processes and policies to effectively manage day-to-day pricing decisions.
The most common pricing mistakes are either targeting the wrong customers or simply pricing too low. To correct these mistakes, take the following actions:
- Utilise a value-based pricing methodology to set the right initial price
- Establish (and enforce) effective policies for managing day-to-day pricing decisions
- Eliminate disconnects between your company’s business strategy and your product pricing
- Align and reinforce your brand image to ensure consistent signals are sent to customers
If you can revise your pricing strategy by enacting the above then you’ll be well on your way to unlocking the untapped profit potential in your business.
All things being equal, a good product and accurate pricing should mean accumulation of a healthy profit.
The Strategy and Tactics of Pricing, Thomas Nagle and Reed Holden 2016
Pricing Strategies for Small Business, Andrew Gregson 2008