In my recent article, How to work out what price to charge, I discussed how pricing is one of the most crucial decisions business owners and managers must make, while touching on the eight rules for pricing effectively… But what happens when you get pricing wrong and how do you recover from pricing mistakes? In this article, I’ll look at some common pricing mistakes and then, in a subsequent one, I’ll discuss the fixes.
Pricing mistakes can be put down to two broad issues – mistakes with pricing psychology and pricing strategy mistakes.
Pricing psychology mistakes
There is a concept known as a pricing paradox (sometimes called ‘water-diamond paradox’). With the water-diamond paradox, we understand that water is necessary to our life and that ornaments such as diamonds are not life-sustaining. But water typically has a low market price, while diamond jewellery has a high market price. The reason is due to what is known as marginal utility and price is based on the value or utility someone places on a product. Consumers will pay based on their perceived value or utility, at a point and place in time. Consumers don’t consider your business’ circumstances, business environment or competition when deciding if they will pay the price for your product or service.
Common pricing strategy mistakes
Unfortunately, pricing is a bit like magic – there is no formula that works for you, me or a particular group. Price needs to consider situations, costs, competition, strategy, and environment. However, there are a few common pricing mistakes and forewarned is forearmed.
- Pricing based on cost rather than value.
How much did you pay for your morning coffee today? $4 for a long black? If the barista were to base the price on cost, then you may have paid only $1!
- Set and forget pricing
When was the last time you updated your pricing? The customers are ‘happy’ with the current pricing (of course they are!) and ‘if it’s not broke don’t fix it’ right?
- Same margin for all products or services
Using the coffee example above, if I were to apply the same margin to the muffin I bought with the coffee then the muffin would cost about $8
Discounting without understanding the ramifications is a dangerous game. A 10% discount to the sales price can lead to the lot larger impact on the bottom line. Discounting also communicates something to the customer and also sets their expectations.
- Price following
Businesses that price follow often do not understand either their customers, or their market segmentation, or their product or service value.
- Blaming lack of sales on price
Nine times out of ten a lack of sales has more to do with a marketing and sales problem than a price problem. In a customer buyer journey price is a long way along the journey. Awareness, informing and educating – all part of the marketing occur well before the sale is made or the price is discussed. Have you tried buying a car – you are well down the track before they salesperson will crunch the numbers and tell you the price.
- Thinking customers can’t afford to pay full price
If I’m working on a recovery engagement and were to think that XYZ Pty Ltd are in dire straights and couldn’t afford me then I’d end up working for free. If your product is well out of your customer’s market (i.e. you’re trying to sell BMW’s to pensioners) then you have your target market screwed up. Either you’re confusing your value proposition, or you’re target market.
- Pricing too low
This is different to low pricing – but you need to know how low is too low. The only customers that love too low prices are the crap customers – the ones you don’t want. The ones you want just get confused and/or suspicious – these customers understand value and want to feel unique. Price needs to make sense to your target market.
- Options – too many or too few
Some businesses make the mistake of providing too many pricing tiers, while others make the mistake of providing too few. The correct amount of pricing tiers for your business will align with your unique buyer personas. Options mistakes extends to payment options too. The recent trend in with services such as ‘Afterpay’ and ‘Zippay’ and credit and pay services such as ‘Square Up’
Understanding the pricing paradox and also really understanding your pricing proposition will set you up for building a profitable business and to master an area that even large and experienced business struggle with.
About the author
Stephen Barnes is the principal of management consultancy Byronvale Advisors. He has over 25 years advising clients from new business start-ups to publicly listed companies and across a wide array of industries. He prides himself on quickly understanding the client’s business and issues, and synthesising problems to develop pragmatic solutions. He is also the author of ‘Run Your Business Better’. You can find out more about pricing by downloading Barnes’ freeBook ‘The Price is Right – Right?’