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5 pricing mistakes and how to avoid them

Pricing your products and services can be challenging at the best of times – and it’s easy to make mistakes along the way. The good news is that with careful planning, research and the right pricing strategy in place, you could feel more confident with your pricing decisions.

Some easy mistakes to avoid when it comes to pricing, and some tips to share.

Mistake #1: Thinking only about cost, not value

It’s important to work out prices that are neither too low or too high. You need to consider the costs for your own business – but there’s much more to it.

If you set your prices too low, because you’re focussed simply on costs, you could leave money on the table and reduce your profitability or even worse trade in loss territory. The consequences of pricing your product too high are also huge. Not only will the cost of sales go up, but your sales cycles will be prolonged, affecting your profits.

Therefore, you must do all you can to find the right balance by considering the value of your products.

How to avoid this mistake

Set your prices based on your customers’ perceptions of value. When your customers perceive your products and services to be of good value, sales go up and your profits thrive.

Price increases may be uncomfortable, but it’s an inevitable part of business. Focus more on the value you bring, than the prices you charge. Your customers may realise it’s better to remain a loyal customer than to look elsewhere.

This is a critical area and remember we are the worst judges on the value we provide. In other words we often get caught in a situation where we undervalue our products and services.

Mistake #2: Holding the same pricing for too long

We often see businesses try to leave their prices at the same level for as long as possible. Business owners fear that if they raise their prices there will be a customer uproar and some of them will leave. You should conduct a price sensitivity analysis on your business and you would be amazed.

Here is a great example:

 

 

 

 

 

Our business analysis software highlights above that for a business with a gross margin of 45% if they increase prices by 10% they can afford to lose 18% of their sales and be indifferent. Thinking about it, do you think the business will lose 18% of their sales? From our experience we have never seen that happen. So anything better than losing 18% will increase overall revenue.

Please contact us if you would like to explore this impact for your business.

How to avoid this mistake

It’s important to get customers used to small changes in price. This allows you to make changes to your pricing based on the fluctuations of supplier costs, demand, and other market changes while still maintaining a healthy profit margin.

Let’s face it, prices are skyrocketing on almost everything, and some customers simply won’t be able to pay more for your products or services. In this case, you may want to offer options for your loyal customers.

For example, to retain customers, perhaps you could let them pay upfront at the current price. They won’t pay more, but you will get payments sooner. Another option is to redirect them to a lower-priced product or service that fits their budget. This is an excellent option for customers who may be paying for features or services they’re actually not using.

Mistake #3: Treating all of your products in the same way

Attempting to achieve the same profit margin across different product categories can be a mistake. Each of your products can come at a different cost to make, may have been subject to different supplier cost increases and can vary in popularity in terms of your sales and customer feedback.

How to avoid this mistake

Check your profit margins, especially if you haven’t reviewed them in a while. Knowing, to the dollar, how much it costs right now to buy or create your products is vital. Check every invoice, as price increases have taken place across most items and services.

Remember that different customers assign different values to the same products. For any one of your products, you can optimise profits when the price reflects your customers’ willingness to pay.

Mistake #4: Raising prices without considering your competition

Price wars can be a costly mistake which can be avoided. We recommend you learn to anticipate the responses of your competitors and be ready to control your reactions.

Understanding how your competitors position themselves in comparison with your business will help you develop your flexible pricing strategy. If you can gather this information ahead of time, you can avoid the costly price wars that destroy industries’ profitability.

How to avoid this mistake

Visit competitor websites and retail stores regularly and make note of the prices they are selling similar products for. If your competitor’s pricing is not available on their website, work with others in the industry to inquire about your competitors’ pricing structure. Keep track of your competitors’ pricing patterns throughout the year.

Mistake #5: Failing to spend enough thought and time on pricing

Holding a hasty, last-minute price meeting to finalise a price on a new product or service can be a recipe for disaster. In such a meeting, people are often unprepared, so decisions can be made based on the sales team’s anecdotes without any data to back up their claims.

How to avoid this mistake

You must establish internal procedures to optimise prices. To set a flexible pricing strategy, a business must first understand the product costs and related selling and overhead expenses.

Combine the material costs, production, overhead and selling expenses to arrive at the cost it takes to produce and sell a product. Then, determine an initial mark-up percentage by adding operating expenses, reductions and profits together and dividing by estimated net sales and reductions. Use the mark-up percentage to arrive at an initial price. Run volume and profit estimates to see if the estimated price delivers the profits required by the business.

How to increase your prices

When it’s time to raise your prices, we recommend communicating this clearly and honestly, giving your customers plenty of advance notice.

If you’ve decided to increase your prices, don’t approach the situation with a sense of dread. Embrace it. Customers are likely to understand that price increases are necessary for your business to succeed – and your loyal customers will want you to stay in business!