You spend months thinking about how to cut costs and increase sales. But how much time do you spend on your pricing strategy? Are you confident you’ve set the right prices for your products or services?
When Rafi Mohammed asks entrepreneurs the latter question at business conferences, very few—if any—raise their hands. And yet, argues the Cambridge, Mass.-based pricing consultant and author of The 1% Windfall: How Companies Use Price to Profit and Grow, examining your pricing strategy is “the quickest way to profit and growth.”
Start by making sure you aren’t committing any of these common but deadly pricing sins:
Sin No. 1: Setting prices with little rhyme or reason. Many business owners set price by choosing a profit margin and applying it across the board. Others look to the competition and follow industry norms. If either sounds familiar, you’re missing a huge opportunity, says Andrew Gregson, a Kelowna, B.C.-based pricing consultant and author of Pricing Strategies for Small Businesses. Price ought to be determined by the value customers put on the product.
Gregson offers a big-company example. By adding a chemical to underground pipes, DuPont solved a major customer headache: the pipes no longer burst underground. Although the cost of applying the chemical was pennies, DuPont was able to charge hundreds of dollars more. “They got away with it because it was sold on the basis of, How long did it take you to dig up that burst pipe?'” says Gregson. The value of the product significantly outweighed the actual cost.
Sin No. 2: Bundling too much—or not enough. Gregson sees it over and over again: companies that start offering more and more (free delivery, for example) to try to close a sale, without analyzing how unprofitable it may become over time. Avoid making such offers permanent, he says. For instance, limit free delivery to the first six months of the contract.
That said, in other cases, companies might be missing an opportunity if they don’t bundle. You can turn something that was once optional into a core part of your service—and raise prices accordingly. A thorough analysis of how your customers value your various services will elucidate which strategy will benefit your firm.
Sin No. 3: Offering a deep one-time discount to inspire a sale. The idea behind Groupon and its many daily-deal group-buying competitors is that, inspired by a huge discount, consumers will purchase a product or service, fall in love it, and return more than willing to pay full price. “That’s one of the biggest pricing fallacies,” says Mohammed. “Once you discount, the value of the product decreases psychologically, and it’s hard for people to justify coming back and paying full price.” He recommends a 20% discount for inspiring trial: “It gets people interested, but doesn’t devalue the product.”