Establishing the ideal price for our products and services is an operation, much more complex than it may seem at first. Not only are our costs involved, or the profit margin we aspire to obtain, but above all something as “intangible” as the perception of value that our consumers have. Especially if we do not take this third element into account, it is easy for our prices to fall short of lack of realism or of potentiality to produce profits. What are the main mistakes made in this field? According to Per Sjofors , CEO of Stratinis (developer of price management software), these eight are the most common .
1. Base prices on costs and not on the perception of the value it has for consumers
Prices that are based solely on costs lead directly to one of these two scenarios: (1) If the price is higher than the value perceived by consumers, the cost of each sale increases, discounts increase by the same amount, sales cycles lengthen and profits suffer. (2) If the price is less than the value perceived by the consumer, sales are growing strongly at the beginning, but in reality the company is stopping making money and beyond, it is certainly not optimizing its profits.
2. Base prices on the market average
By accepting the average market price, companies accept that their product or service has been transformed into a commodity , a raw material that can be obtained anywhere without any real difference. It is a way of “giving in” to comfort, despite the narrow profit margin that this strategy translates. Instead, companies should keep looking for new ways to differentiate themselves, to create value for different market niches.
3. Bet on the same profit margin for all product lines
Some business strategies advocate uniformity across all product lines, aiming for the same benefit. This uniformity ignores that law that states that different customers assign different values to identical products. Again, the actual perception of value is not taken into account.
It is interesting to note that the profit margin must also reflect how willing a customer is to pay for a certain product, so pre-establishing a profit margin that does not take that perception into account is counterproductive.
4. Not correctly segmenting customers
The segments of our market are basically differentiated by the different needs that our clients may have for the products we offer. The value proposition we offer is different for each segment, and our pricing strategy should reflect that difference.
This strategy must take into account all the characteristics that define the product for each market, its packaging, delivery options, marketing messages that we position, etc. in order to capture the additional value we create for each segment.
5. Keeping the same price for too long
Many companies fear the reaction of their customers to a price change, so they delay the decision for as long as possible. Other companies, on the other hand, accustom their customers to frequent price changes, which take into account rapid market fluctuations. It is important to realize that the value proposition of our products changes as the market changes and that therefore our pricing strategy must reflect those changes.
6. Commercials incentivized solely by sales
A common strategy of many companies is to incentivize their sales representatives based on the sales they make, rewarding their total volume, even if they are made at the lowest possible price. This is a fairly frequent error that occurs especially when this sales force has the power to negotiate all kinds of discounts. By incentivizing only sales volume and not value, much of the benefits are often lost along the way.
7. Change prices without taking into account the possible reaction of the competition
Our pricing strategy does not move in an unalterable vacuum. On the contrary, it is normal for each action to provoke a reaction . When changing prices, it is necessary to take into account not only their competitive aspect, but that at the same time they can continue to give rise to quality products or services that are maintained before the possible reaction of competitors.
8. Not paying enough attention to pricing strategy
There are three fundamental variables in calculating profits for a company: costs, sales volume and average price. In this sense, many companies are betting on a strategy based on reducing costs, thus hoping to increase sales volume. Without very sophisticated analysis they reduce the first term in order to multiply the second. And yet setting the ideal price is not a decision to be made lightly. It is more convenient to have the appropriate tools that allow us to monitor in real time what those costs are and how they affect our product.
