Eight Pricing Strategy Errors to Avoid
Pricing is an essential element in any winning business strategy, but it’s also a complex and difficult task. Whether it’s the lack of accurate data, the difficulty of aligning all the moving parts (sales, marketing, c-suite), or just the challenge of adapting to change, pricing mistakes can have a huge impact on a company’s bottom line and long-term success.
We'll examine eight of the most frequent errors in pricing strategies in this chapter, in addition to offering sensible advice on how to avoid or conquer them.
Mistake 1: One of the most basic pricing mistakes companies make is their failure to understand the perceived value of their products from their customers’ point of view. Failing to understand why customers are willing (or unwilling) to pay gets companies into trouble by causing them either to set prices too high (and alienate potential buyers) or to set prices too low (and therefore cut into profits in a big way).
To avoid this, it is important to conduct extensive market research and to do a very careful job of customer segmentation. In parallel, firms must build a deep understanding of the specific needs, wants, and value drivers of each target segment. Among the tools that may be used are conjoint analysis, customer surveys, and focus groups, combined with analysis of historical purchase behavior and demographics.
Mistake 2: Overlooking Competitor Behavior and Responses: Another pricing pitfall is neglecting to consider competitors’ behavior and responses. In today’s highly competitive technology and service markets, monitoring competitive moves and then adjusting pricing and ancillary strategies accordingly is a continuous and never-ending process.
This does not imply engaging in some sort of bone-headed race to the bottom on price but simply knowing exactly what value you uniquely create and how you position it relative to your competitors. By tracking competitor prices, promotions, product introductions, and back-counting the cost of materials out of existing list prices, you can see potential threats and opportunities coming miles away and trigger your own commands to keep an offering compelling and differentiated.
Mistake 3: Depend Too Much on Cost-Plus Pricing: Cost-plus pricing could be a good starting point for price setting; it is seldom the most productive or profitable route in the long run. If a company charges only a fixed markup to production costs, it may fail to capture the full value of its offerings or react to altered market conditions.
Instead, think about implementing value-based pricing strategies that connect the prices you charge with how much customers believe what you sell is worth and the benefit they'll enjoy from buying it. That could mean using methods such as conjoint analysis, economic-cost-value estimation, competitive benchmarking, and a philosophy of trying different pricing models and packages to see which one works best.
Mistake 4: Failing to Take the Psychology of Pricing into Account Pricing is about more than just economics—it’s about psychology too. How prices are framed, displayed, and communicated can have a profound influence on customer perception and behavior, even if the intrinsic value of the offering remains constant.
In order to take advantage of the psychology of pricing, think about anchor pricing (starting out with a high price to make other offers appear more reasonable), charm pricing (using prices ending in .99 or .9 to imply a good deal) or decoy pricing (displaying an ugly option to make other options look more attractive). By knowing and using these ideas, you can cause clients to accomplish what you want and then some.
Mistake 5: Failing to segment and differentiate Pricing is an inherently individual exercise; one price does not fit all. Different customer segments have different needs, wants, and propensities to pay. Failure to understand and respond to these differences is a failure of pricing that leads to suboptimal prices and lost opportunity.
To prevent this mistake, think about creating different pricing layers, packages, or groups that reflect the individual preferences and value appraisals of each targeted part. This can include offering numerous feature sets, service levels, or pricing models determined by features like the representative’s size, activity, or usage case. By providing a wider choice of options and price spots, you can seize a greater part of society and improve revenue and profit.
Mistake 6: Failing to Recognize the Primacy of Timing Pricing is everything, and failing to address the temporal dimensions of customer behavior and market dynamics can result in big missed opportunities or lost revenue. For example, launching a new product or service at the wrong moment (e.g., during a recession or around Christmas) can sharply limit its uptake and success, while neglecting to adjust prices in line with changing costs or demand can steadily erode margins and competitiveness over time.
To ensure optimal timing of your pricing strategies, there are a number of considerations to keep in mind. These can be loosely broken down into three categories: seasonal trends, business cycles, and customer buying patterns. Some examples of matching your pricing strategy to these cycles include techniques such as:
· Dynamic pricing: The price of your products is adjusted in real-time as a function of supply and demand.
· Time-limited promotions: Discounts for a limited period of time to encourage an immediate purchase, as the customer waits longer their willingness to pay gradually reduces.
· Subscription-based models: Set a flat rate price regardless of the quantity of products/services you receive, allowing you to spread your decision-making in terms of purchasing throughout the entire year. This strategy even outs the cash flow throughout the year.
By aligning your pricing with the natural rhythms and cycles of your market, you can ensure that your strategies will have maximum impact and effectiveness.
Mistake 7: Failing to Recognize the Value of Transparency and Communication Customers can be very sensitive, and sometimes emotional when it comes to pricing. Not being clear on your pricing changes and policies, or not communicating them at all, can therefore lead to lots of confusion, frustration, and potentially even some backlash. When social media and online reviews are getting common even popular, it’s incredibly important for companies to be upfront and proactive in communicating, even sharing, your pricing strategy with customers. Customers’ feedback, positive or negative, is important to approve or disapprove pricing strategies.
One way you could do this is by providing well-organized billing specifics on your website or flyers, creating reasons or briefings for pricing changes or differences, or communicating with clients directly to address their needs and concerns. With transparency and open communication, you can reassure and secure your clients even though some difficult pricing decisions are being made.
Mistake 8: Neglecting To Stay Updated And Flexible: Lastly, a very typical and expensive pricing mistake is a failure to continuously monitor and adapt pricing to changing market and customer conditions. In fast-paced and dynamic technology and services industries, prices and value propositions that were successful yesterday can become outdated or uncompetitive tomorrow.
A commitment to continuous improvement and experimentation in pricing strategies is critical in order to overcome this mistake. That may entail methods such as A/B testing, price elasticity analysis, or customer feedback loops, along with an ability to change or pivot based on new data and insights. By remaining nimble and responsive to changes in the market and customer preferences, you’ll ensure that your pricing strategies are at all times up-to-date, effective, and profitable.
It’s fair to state that pricing is a challenging and multi-dimensional discipline that requires a profound understanding of customer value, competition dynamics, and market trends. By avoiding these eight common mistakes and embracing a data-oriented, customer-centric pricing approach, technology and services firms can achieve new levels of growth, profitability, and competitiveness in today’s dynamic and shifting business environment.
From our book:
Pricing for Profitability and Growth
Mastering Pricing Strategies in Technology and Services Globally
Ebook: ASIN: B0D7GMJQLW Paperback: ASIN: B0D7L9GJQH