Many clients are losing ground simply because they may be charging too little for their product or service. In this price conscious economy that might sound a little weird but it’s true. Lots of businesses will go under this year because they will discount their widgets to the point where they no longer can keep their doors open. Here are some things to consider before you get that big red pencil out.
Basing your prices on costs, not customers’ perceptions of value Does a Rolex watch really cost between $3000 to $6000 to make? It would have to since they retail for between $6000 and the moon. Prices based on costs invariably lead to one of two scenarios: (1) if the price is higher than customers’ perceived value, the cost of sales goes up, sales cycles are prolonged and profits suffer; (2) if the price is lower, sales are brisk, but companies are leaving money on the table, and therefore not maximizing their profit.
Basing your prices on “the marketplace” Well that’s what they are charging across the street. The marketplace is often cited as the “wisdom of the crowds”—the collective judgment of a product’s value. But by resorting to marketplace pricing, companies accept the commoditization of their product or service. Instead, business owners must find ways to differentiate their products or services so as to create additional value for specific market segments. Is your product or service a commodity?
Attempting to achieve the same profit margin across different product lines
Cost accountants sometimes get stuck on this one. Some financial strategies support a drive for uniformity, and businesses try to achieve identical profit margins for disparate product lines. The iron law of pricing is that different customers assign different values to identical products. For any single product, profit is optimized when the price reflects the customer’s willingness to pay.
Failing to segment their customers A cord of wood costs a helluva lot more in New York City than it does in Watertown New York. Customer segments are differentiated by the customers’ different requirements for your product. The value proposition for any product or service varies in different market segments, and price strategy must reflect that difference. Your price strategy should include options that tailor your product, packaging, delivery options, marketing message and your pricing structure to particular customer segments, in order to capture the additional value created for these segments.
