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
Prices based on costs invariably lead to one of two
If the price is higher than customers' perceived value, the
cost of sales goes up, sales cycles are prolonged and profits
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
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'
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'
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
Using insufficient resources to manage pricing
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
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
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
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.
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