Selecting the right price for your product or service can be one of the most challenging decisions you will make as a business owner. This is because it goes a long way to determining your success in the market and can be difficult to recover from if you make the wrong decision. After all, you don’t want to sacrifice profits unknowingly.
Here are the ten commandments of pricing strategy that tell you which sins you should avoid at all costs:
1. Thou Shalt Not Resort to Commoditization. When you base your pricing decisions on what the marketplace is doing, including your competition, it becomes a battle over price tags. All this does is cut the margins and everyone loses. It becomes a price-cutting war between competitors where profit margins are shredded. The consumer then views a particular product as a commodity so there is nothing there to excite them. Instead, you should focus on differentiating your product or service and then charge accordingly for the fact that no one else has quite what you offer. The idea is that you should pay more for something that is different, and consumers will not fight you on that.
2. Thou Shalt Not Assume All Customers are the Same. While there are some similarities among your customers, you cannot price based on the idea that they are all the same. When you assume they are the same, you will miss out on satisfying many of your target audience’s needs and will lose them with your simplistic pricing strategy. If anything, you need to focus on segmenting your customers and invest in understanding what makes them different, where their values diverge, and how they perceive their needs and desires. Once you know that, then you set a pricing scale that addresses each customer segment.
3. Thou Shalt Not Base Pricing on What Salespeople Think. It may seem right to consult with salespeople and other customer-facing staff for the intelligence you need to create your pricing strategy, but it is actually sinful because it is imperfect data. While there may be some insights that could be further investigated and cross-checked with other sources, the information gathered by salespeople are basically tied to their perception of what the customer may have said. There are also more opinions floating around in this type of data than quantifiable proof from which to base an entire pricing strategy on.
4. Thou Shalt Not Price on Cost. Instead of basing the product or service price on the cost of making it, focus more on a price that more accurately reflects what customers perceive as valuable about it. There is no one-price-fits-all strategy that has ever maximized profitability. If a customer actually perceives more value from the product or service and you are not coming up with a number to match it, then you are underpricing yourself and leaving revenue on the table. Often, consumers follow the adage that “you get what you pay for,” so when you price higher, then consumers are going to equate that with quality, differentiation, and even exclusivity all of which they value. Don’t undersell your product, service, and/or brand.
5. Thou Shalt Not Assign Every Product the Same Profit Margin. If you have multiple products, a huge mistake is assuming that you can assign the same profit margin across the portfolio. You cannot bring uniformity to something that is different every way – from the materials and the manufacturing to the problem it solves and, therefore, how it should be priced. This also goes back to the idea of value in which consumers assign a different value to each type of product or service they use, so you need to do the same or you will be losing profitability by homogenizing your pricing strategy.
6. Thou Shalt Not Let Prices Stagnate. An unforgivable pricing strategy sin is to let a price stay the same for a long time. Just consider your profit dead in the water if you never bump up your price over shorter periods of time. You will not lose all your customers by raising your prices periodically. Instead, these incremental price increases are a way to reinforce the value proposition that your customers have formed with your product or service. Also, if your competition raises their prices before you, they get first dibs at that extra profit margin that should have been yours.
7. Thou Shalt Not Under-Invest in Pricing Practices. It’s a huge sin to assume you can just get by with the simplest pricing practices available rather than to invest any resources to upgrade these practices. The competitive environment and depth of consumer expectations are only growing more complex so simple pricing practices just don’t work. However, those companies that have deployed sophisticated new pricing strategy tools and technology have found greater success with their price points because they have been analyzed on many levels for enhanced insights. Remember that pricing is not an art; it’s an exact science.
8. Thou Shalt Not Create Volume-Based Sales Incentives. When your pricing strategy is tied to a volume-based sales incentive program, sales people will obviously focus on getting the most volume. The best place to start is with the lowest priced items in the product line or they will offer discounts just to seal the deal. However, this does not earn your company the greatest revenue. Now, if you were to anchor that incentive program to revenue or sales closed at a premium, your pricing strategy might be redeemed.
9. Thou Shalt Not Change Prices Before Anticipating What the Competition Might Do. You certainly don’t want to make reactionary price changes when it comes to the competition. It is important to research and track what your competition has been doing in the past with their pricing as this can help you to anticipate potential future action. You not only want to look at the history of their price changes, but you also want to access their product or service quality and differentiating features that may impact upon the consumers’ value perception.
10. Thou Shalt Not Develop a Last-Minute Pricing Strategy. When you make your pricing strategy an afterthought and leave it to the last-minute, you most likely did not gather the analytics and research necessary to make a wise decision. Instead, you are banking on some salespeople’s opinions and a quick review of price sheets from the competition that you got your hands on from the year before. You might have even gathered a few data points that “guesstimate” your product or service cost structure. It is an unconscionable sin to create a pricing strategy based on assumptions that were thrown together for an emergency pricing meeting. Instead, take the time to gather the facts you need and put the internal processes in place to make this happen so your pricing strategy is built on solid information.
By following these commandments and avoiding these sins at all costs, you have a better chance of increasing the competitive advantage and profitability compared to spending energy on cost-cutting measures. By creating pricing strategies that address specific market segments, emphasize value, differentiate profit margins, research competitive reactions to price changes and regular price point changes, you will achieve the profit margins you were targeting and maybe even more.