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For many businesses, price is just the $ number given to a product or service based either on cost-plus, market price, or even a gut feel.
Price very often is an afterthought, the last consideration in the process and this is where so many companies leave money on the table. This thinking needs to be turned on its head and businesses need to start thinking about pricing at the very beginning and in terms of customer needs, customer value, and willingness to pay.
An automotive supplier to a well-known car manufacturer, priced its park assist at $100 based on costs and margin expectation. The car manufacturer recognised the value of park assist to its customers and sold it for $670. The automotive supplier left significant value on the table by failing to recognise customer value. You don’t want to be making this same mistake!
Businesses invest significantly in cost control and cost reduction programs to improve their profitability. Yet, the most powerful profit lever, pricing, is completely overlooked. A study by McKinsey shows that a 1% price increase can deliver a 12% profit improvement. Very often, businesses achieve much more.
One of the biggest challenges facing businesses today; from startups to well-established multi-nationals, is pricing and there are 7 common pricing mistakes made by most businesses.
Mistake #1: Basing pricing strategy on costs and not on customers’ perception of value
Contrary to popular belief, your customers are not concerned about your costs. They are looking for a solution to their problems and they will pay a certain price in exchange for the outcome, the benefits, and the value they receive from your products and services.
Using a cost-plus pricing model only, will result in you either
1) over-charging or
2) under-charging your customers.
You will either lose the customer or leave value on the table. Cost-plus pricing is divorced from value and your cost structure may be quite different to that of your competitors, causing even more pricing issues.
Mistake #2: One size fits all approach to pricing
All customer needs are not equal and different customers will have different needs from your products. Geographically, prices will vary too depending on market dynamics and competitor landscape. By charging the same price to all your customers, you are destroying value by over-charging some customers and under-charging other customers.
Some customers are looking for a no-frills offering whilst others want to work collaboratively with you, and they are willing to pay a higher price for the additional value that they receive from you. The value proposition of your product or service differs across your customer base and segmenting your customers based on their needs increases profitability and reduces competitive intensity.
Mistake #3: Applying the same margin expectation to all your products
Products and services do not all add the same value to your customers and therefore applying the same margin expectation will either adversely impact your sales or bring down the market price. Setting margin expectations for an innovative and differentiated product at the same level as a me-too product in a highly competitive market will not only destroy value it will also reduce your profits.
Mistake #4: Not having a pricing strategy to deliver your business objectives
Very often pricing decisions are made very last minute and hastily based on little research or information. These tactical decisions fail to take into consideration the corporate and marketing objectives of your business. Strategic pricing supports your business in achieving its corporate and marketing objectives. Consideration must be given to customer needs, competitive landscape, how your product creates value for your customers, internal capabilities, costs, and profitability. Your company cannot be everything to everyone and therefore you must be selective in which customers you choose to serve.
Mistake #5: Discounting prices
So many companies grossly underestimate the adverse impact that sales price discounting has on their bottom line. Sophisticated buyers will always negotiate prices downwards and attempt to devalue your offering. Rather than reduce your price, focus on adding value to your product.
Sales can then engage buyers in a value conversation and reframe price discounts as a discount to value and take something off the table in return for that discount. Your discounting policy’s goal must be clear and structured and encourage and reward the desired behavior from customers.
Mistake #6: Incentivising Sales on revenue alone and ignoring profits
Sales behavior is influenced by the incentive scheme that you put in place. If the bonus is based on revenue alone, then Sales will focus on volume and margin then becomes secondary. You will achieve your sales revenue target at the cost of much lower profits.
Mistake #7: Holding pricing at the same level for too long
Many companies fear the reaction of their customers to price increases. However, ignoring customer needs, market dynamics, and cost increases will adversely impact your profits. Businesses need to proactively manage Sales and customer expectations and behaviors around price changes. Annual price increases can successfully be implemented.
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