The Top Three Mistakes Made with Pricing (Article 1 of 3)
The Top Three Common Pricing Mistakes
(Article 1 of 3)
Using Guesswork as a Pricing Strategy
Over the time I have worked in this field, I have lost count of the number of companies that continue to make mistakes with their pricing strategy. Making these types of mistakes is totally avoidable if you recognize that want you are doing is one of (or all three) of those mistakes. All of these mistakes in pricing will lead to a business performance level that is well below par, meaning you will experience a lower profit margin and sales volume when compared to setting your pricing to your customers’ willingness to pay for your products and services. In some cases, both.
This three-part article series has covered the top three most common pricing mistakes businesses make. Now, let’s look at the first mistake companies still make when setting their prices.
It may be a slight exaggeration that some businesses continue to use guesswork as part of their pricing strategy for their products and services, but there may be some essence of truth in that statement. However, it is my experience that most people involved in pricing strategy in their companies have some intuitive sense of what price to set. For instance, they will compare prices of similar products or services to their own that are offered by different vendors in the market. Other variables are taken into consideration when setting their prices such as the value they place on their products and services as well as what purchasing experience they have had. When taking all this together, the practice of “guessing” to set prices, is at best, an informed guess. But is guessing the best way forward regarding pricing strategy? Many companies attach different names to their practice of guessing, like some of the following:
Some companies will state that they use what is called the “market price.” But there is a problem with this approach. If the prices of the items sold are not published on commodity exchanges, then it is virtually impossible to find the “market price.” Another approach of companies who state they incorporate the “market price,” does so by sending out their sales personnel to try and negotiate the very best deal possible. However, this approach very rarely pays dividends for the simple reason that people who work in sales will try to make a sale at the lowest price possible, which is going to leave lots of your money on the table.
Some companies are pretty confident that they absolutely “know what their customers are willing to pay” for their products and services. But this confidence is misplaced because either the company or sales personnel who are responsible for setting the product and service prices are doing so through a sheer guess or their gut feeling or even on a whim; if challenged, these people would rarely welcome any constructive discussion on their decision-making prowess. Why is that? Well, because they think they are in the “know” or some sales personnel may have approached their customers to gather data to set their prices for their products and services. But here lies another problem. Customers are highly unlikely to tell you the whole truth about how much they are willing to pay for your products or services. And the reason for this behavior is that they will always give you a lower figure because they want to get the best deal available from you, the next time they want to purchase from you. So, the customer is looking out for #1—themselves, not your sales figures or profit margin.
There are other companies who will state that “they use both their gut feeling as well as their market knowledge” to dictate their pricing strategy. There is at least one thing going for that type of bold statement—it is an honest one. That recognition is a good thing for the company that thinks like that because that realization of using an imprecise method for their pricing strategy means that they are probably open to other methods in helping them set their product and service prices to a more optimum level, that will bolster the company’s sales volume, revenue, and profit margin. That becomes a win-win situation both for your company and your customers, as each is getting what they want.
So, what is all the fuss about using guesswork as a pricing strategy? Is it really a problem? Well to be totally frank with you—it is a big problem.
There are three categories that companies fit into that use guesswork as part of their pricing strategy. Let me explain those to you.
In the first category are the companies whose guesswork was so way off the mark that they hardly made any sales, or not enough sales, which in turn did not generate any real profit. Companies who fall into this category basically fail—they go out of business because they cannot compete in the market with the prices they set.
Companies who are in the second category are those who set their prices at a level that is not “right enough,” yet they manage to stay in business, however, the prices they set are “wrong enough” that their business will be an uphill struggle. Factors that attribute to this are companies setting their prices too high, so their sales volume is impacted (making hardly any sales), or in the opposite direction, setting prices too low, which in turn, will reduce their margin. Another factor that creates a very low sales volume is setting a rock-bottom price – because a product or service with a low price attached to it can be viewed by the potential customer as having a message that conveys substandard (poor) quality and little benefit, so they won’t buy it because of that.
The third category invariably includes companies whose guesswork in setting their prices is nearly right but not quite. These companies may do fairly well in the market probably matching their competition. But that is not enough. Companies like these are still leaving money on the table, in some cases, a lot of money; also, they are not tapping into the full potential regarding sales volume; there’s more to be had—if you know where to look. I can help you with that.
There are a few reasons why some companies use guesswork to set their prices. For instance, an individual or an entire team for that matter may truly believe that the guesses they make, gut feelings, hunches, or assumptions are actually correct. Also, it could be as simple as these people not knowing any better. However, it is essential that companies realize the importance of setting the right price for the products and services they offer to their customer base.
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