We use cookies to give you the best online experience. By using our website you agree to our use of cookies in accordance with our cookie policy. Learn more here.Close Me
Here is a list of the ten most common mistakes companies make
when pricing their products and services.
Basing prices on costs, not customers' perceptions
of value
Prices based on costs invariably lead to one of two
scenarios:
If the price is higher than customers' perceived value, the
cost of sales goes up, sales cycles are prolonged and profits
suffer.
If the price is lower than customers' perceived value,
sales are brisk but companies are leaving money on the table and
are therefore not maximising their profit.
Basing prices on "the
marketplace"
The marketplace is often cited as the
"wisdom of the crowds" – the collective
judgment of a product's value. But by resorting to marketplace
pricing, companies accept the commoditisation of their product or
service. Instead, management teams must find ways to differentiate
their products or services so as to create additional value for
specific market segments.
Attempting to achieve the same profit margin across
different product lines
Some financial strategies support a
drive for uniformity, and companies try to achieve identical profit
margins for disparate product lines. The iron law of pricing is
that different customers assign different values to identical
products. For any single product, profit is optimised when the
price reflects the customer's willingness to pay.
Failing to segment customers
Customer segments are differentiated
by the customers' different requirements for your product. The
value proposition for any product or service varies in different
market segments, and price strategy must reflect that difference.
Your price strategy should include options that tailor your
product, packaging, delivery options, marketing message and pricing
structure to particular customer segments, in order to capture the
additional value created for these segments.
Holding prices at the same level for too long, ignoring
changes in costs, competitive environment and customers'
preferences
Most companies fear the uproar of a
price change and put it off as long as possible. Savvy companies
accustom their customers and their sales forces to frequent price
changes. The process of keeping customers informed of price changes
can, in reality, be a component of good customer service.
Incentivising salespeople on revenue generated rather
than on profits
Volume-based sales incentives create a
drain on profits when salespeople are compensated to push volume at
the lowest possible price. This mistake is especially costly when
salespeople have the authority to negotiate discounts. Companies
should define their salesperson's "job" as maximising
profitability, and then incentivise profitability.
Changing prices without forecasting competitors'
reactions
Any change in your prices will trigger
a reaction by your competitors. Smart companies know enough about
their competitors to predict their reactions, and get ready for
them. This avoids costly price wars that can destroy an entire
industry's profitability.
Using insufficient resources to manage pricing
practices
Cost, sales volume and price are the
three basic variables that drive profit. Most management teams are
comfortable working on cost reduction initiatives, and they have
some level of confidence in growing their sales volume. Many
companies, however, only utilise simplistic price procedures.
Failing to establish internal procedures to optimise
prices
In some companies, the hastily-called
"price meeting" has become a regular occurrence
– a last-minute meeting to set the final price for a new
product or service. The attendees are often unprepared, and
research is limited to a few salespeople's anecdotes
– perhaps about a competitor's price list –
and a financial officer's careful calculation of the
product's cost structure across a variety of assumptions.
Spending a disproportionate amount of time serving the
least profitable customers
Know your customers: 80% of a
company's profits generally come from 20% of its customers.
Failure to identify and focus on this 20% leaves companies
undefended against wily competitors. Such failure also deprives the
company of the loyalty that more attention and better service would
provide.
Why pricing is crucial
The optimisation of pricing strategy is as important as the
management of costs and the growth of sales volume. Rigorous price
optimisation is a crucial source of competitive advantage and
increased profitability.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
One of the greatest challenges facing employers today is finding and keeping good employees. This article describes some effective employee retention strategies that will help you retain good staff and develop a stable workforce.
The legislation, introducing the Senior Accounting Officer (SAO) measures, places personal accountability on senior financial officers in relation to accounting arrangements that support the basis of various UK tax filings.
In the first of three articles, Jon Hepburn from The Fedora Consultancy offers practical business development ideas that will help you put your clients and potential clients at the centre of the decisions you make about your firm’s future.
Strategic planning is crucial to profitable business growth, but companies typically realise only about 63% of their business strategy's potential financial value because of defects and breakdowns in strategic planning and implementation.
In the second of three articles, Jon Hepburn from The Fedora Consultancy continues to provide practical business development ideas for small to medium size law firms.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
