Pricing is the strongest weapon that you can wield for better profits. Research has shown that it has the most significant effect on a company’s bottom line. A percent of increase or decrease in the price can affect its operating profit by as high as 11%, while cost-cutting by the same 1% has a meagre effect of 2.7%.
Thus, it can be tricky to poke prices even by just a tiny bit. A small adjustment can spell success or disaster, so it’s important to take note of these seven biggest pricing mistakes you can easily avoid.
1. Not Considering the Target Market
In one of our favourite entrepreneurship books, The Purple Cow, it greatly emphasizes customer-centric ideation and marketing. The same goes for pricing. The first thing you need to consider when setting your price is looking at your target market, and not anything else. Costs, competition, and other such items should come second only to your target market.
How to avoid it: Conduct thorough research to get to know your target market, your ideal client. Because it involves more legwork than, say, marking up prices based on costs, a lot of companies neglect this pivotal step. However, if you are able to come up with a pricing strategy that responds to the functional, financial, and emotional value that customers relate to your product or service, then you’re surely going to hit pricing gold.
A note: This should be done on the regular, as customer behaviour is ever-changing.
2. Not Customizing Pricing
This mistake relates to the first one, which puts into importance the customer. Businesses today can be successful if they pay close attention to the customer – what they want, how they place value on products, how they behave in the current market. The catch here is that your pool of customers in your target market isn’t a collective brain with a single pricing preference that relates to a single product or service.
How to avoid it: Your prospective and existing customers are your free resource in pricing. Always pay attention to the questions they ask when they inquire, in the middle of a sale, and even after they purchase your product or service. Are there patterns on which you can craft pricing strategies? For instance, clients of premium sleepwear may share a preference for ultra-comfortable hypo-allergenic jammies. However, while a bride-to-be is more likely to pay a slightly higher price for two sets of matching pyjama sets, a mom of four might shy away from your premium products no matter how much she wants them. Creating different-priced options for different types of customers will help you capture the bulk of the target market and win the pricing war.
A note: Sometimes, in the quest to be able to cater to as many customers as possible, companies fall into the trap of low-priced products that barely create profit. Decide on the lowest price that’s aligned with your brand and target market.
3. Offering Initial Discounts
This comes off as desperate. If you were able to craft your whole pricing strategy around the value that it will give your target market, you do not have to worry about missing out on clients because you didn’t give them an initial discount. Some businesses think that pricing high tells their clients that their product or service is of high quality, and then giving an initial discount tells that getting such a premium product or service at a low price is an opportunity that shouldn’t be missed. Blame it on home TV shopping, but that’s not a good pricing strategy. It only devalues what you are selling.
How to avoid it: Instead of giving an initial discount, provide attractive client attention from the get-go. Give impeccable customer service to establish your brand in the price point that is best for your target market. You may also offer add-ons that give more value to what they’re paying for. These cost you little and result in more profit.
A note: Ensure that your add-on offers don’t hurt your profit. These giveaways should make your clients feel that they’re getting more value, but not at such high costs.
4. Not Discounting at All
On the other side of the discounting mistake is that of not offering or giving any discount at all. While an initial discount may come off as desperate, refusing to give discounts to asking clients is a sign of misplaced pride. Sure, you priced your product based on customer perception, and you believe that your price is equivalent to the value it gives, but there’s also value in being a flexible business that listens and sometimes gives way to its customers. In fact, service-based businesses may find that their best clients are those that asked for discounts, as they are ones who are keen on booking.
How to avoid it: Still along the lines of putting the customer on top priority, you can avoid this mistake by listening well to what your customers have to say. Even if at times you cannot give them the discount that they’re asking for, the gesture of listening to your clients and arriving at a compromise will strengthen your customer relations and drive high profits in the future.
A note: Always take into consideration the price that gives you profit. If you’re swayed by smooth negotiation skills, you might end up giving away your business to your customers instead of earning profits.
5. Not Considering All Costs
From a business owner’s point of view, the costs that affect profit may look like they’re limited only to rent, salaries, and research. However, there are little costs here and there that add up to a huge chunk that may slice your net profit in half. These costs may include credit card fees, delivery charges, and shipping costs.
How to avoid it: Strictly keep all costs in check. If you have an operation that’s getting bigger by the day, it might be wiser to hire talent that will ensure all costs are taken into account. This is more cost-effective than making big pricing mistakes that may result in irreparable damages to your bottom line.
A note: It’s best to review costs on the regular to maximize your revenue. If you’re confident in your pricing but it’s still not driving profits, you might have to take other ways to increase profits.
6. Pricing Too Low
A common misconception in pricing (and doing business in general), is that the lower the price, the higher the profit. Some even argue that volume compensates for the price, so there’s nothing wrong with pricing low as long as you’re able to sell as much or as many as possible. However, this traps your business in the environment with a harsh climate centred on price wars. You might end up at a point where you’re desperately selling low to break even. Moreover, it’s typical of customers who are after low-priced products or services to be even more demanding and hard to please.
How to avoid it: Leave this customer bracket in the hands of other businesses. It is best to go for the bracket that fits your brand and the type of service or product that you offer. That way, you can go after them by providing value instead of a low price. This is an ideal scenario where trust can be built over a mutually beneficial client-business relationship. Ultimately, it’s a scenario where profits are earned.
A note: The other end of the pole here is pricing too high. Customers might feel that you’re taking advantage of their purchasing power and in turn, might not repurchase. Again, this breaks the trust that you should be earning from your customers. Earn their trust, and you earn profits.
7. Not Branding Well
If after thorough research of the market, the industry, and the competition, you still find your business unable to make sales, the problem may be lying on your inability to communicate the value that you offer. This is where a good branding strategy comes in. Pricing goes hand in hand with branding, as they both aim to tell target customers of the value that they are getting out of your business. If your pricing does not match the image that your customers perceive about your business, you will not be able to make successful sales.
How to avoid it: Show, don’t tell that your product or service is worth it. Make sure that your brand image shows that your product justifies the price. If you must, avail of branding services from an agency. It might seem such a superficial aspect of the business, but a strong brand that reflects in all aspects – from packaging to marketing, customer service and even internal operation strategies, will eliminate the disconnect between your product and its price.
A note: Make sure that you are honest in your branding strategies. Another disconnect will happen if you package your product to promise more than it can deliver. This can create confusion within your target market, which can, in turn, affect your pricing strategy.
You can also listen here from our live discussion on Uncover Wealth Radio hosted by Annette Ferguson.