Establishing the ideal price for our products and services is an operation, much more complex than it may seem at first. In it, not only our costs intervene, or the profit margin that 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 into account this third element, it is easy for our prices to go down either from a lack of realism, or from a potentiality to produce benefits.
What are the main errors that are committed in this field? These eight are the most common …
1) Basing prices on costs and not on the perception of the value it has for consumers
Prices that are based solely on costs, directly lead to one of these two scenarios …
- If the price is greater than the value perceived by consumers, the cost of each sale increases, the discounts increase to the same extent, the sales cycles are extended and the benefits suffer.
- If the price is lower than the value perceived by the consumer, the sales grow strongly at the beginning, but in reality the company is not making money and beyond, of course it is not optimizing its benefits.
2) Base prices on the market average
By accepting the average market price, companies accept that their product or service has become a commodity, a raw material that can be obtained anywhere without a real difference. It is a way of “surrendering” to comfort, despite the narrow margin of benefits that translates this strategy. Instead, companies should continue to look for new ways to differentiate themselves, to create value for different market niches.
3) Betting on the same profit margin for all product lines
Some business strategies advocate a uniformity in all product lines, aspiring to obtain the same benefit. This uniformity ignores that law that states that different customers assign different values to identical products. Once again, the real perception of value is not taken into account.
It is interesting to note that the profit margin must also reflect the willingness of a customer to pay for a given product, so pre-establishing a profit margin that does not take into account that perception is counterproductive.
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4) Not segregating clients correctly
The segments of our market are basically differentiated by the different needs that our customers may have for the products we offer. The value proposition we offer is different for each segment and our pricing strategy should be a reflection of 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. with the objective of capturing the additional value that we create for each segment.
5) Keep the same price for too long
Many companies fear the reaction of their customers to a price change, so they delay the decision as long as possible. Other companies, on the other hand, accustom their customers to frequent price changes, which take into account the rapid fluctuations of the market. It is important to realize that the value proposition of our products changes as the market changes and that, therefore, our pricing strategy should reflect those changes.
6) Commercials motivated solely by sales
A common strategy of many companies is to encourage their sales people based on the sales they make, rewarding the total volume of them, even if they are made at the minimum possible price. In a quite frequent error that occurs especially when this commercial force has the power to negotiate all kinds of discounts. By encouraging only the volume of sales and not the value, it is common for a good part of the profits to be 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. To change the prices, one must take into account not only the competitive aspect of the same, but at the same time they can continue to give rise to quality products or services that are kept up to the possible reaction of the competitors.
8) Not paying enough attention to the pricing strategy
There are three fundamental variables in the calculation of benefits for a company: costs, sales volume and average price. Many companies are betting in this sense for a strategy based on reducing costs, hoping in this way to increase the volume of sales. Without very sophisticated analysis they reduce the first term in order to multiply the second. And yet establishing the ideal price is not a decision that should be taken lightly. It is more convenient to have the right tools that allow us to monitor in real time what these costs are and how they affect our product.