Business owners must understand how pricing plays a significant role in their companies’ success. Applying the best pricing practices will allow you to grow your enterprise and keep customers coming back.
Although strong pricing structures and strategies are valuable tools when determining your pricing, it’s common for companies to make mistakes. Sometimes, it’s challenging even to recognize these errors. Business owners can go years without realizing the effects of mispricing.
Putting a price on a product or service is no simple task — many factors come into play. Competition, customer perception, industry prices and overhead costs are only a few of the components.
In a survey of 1,700 companies, 85% of business-to-business (B2B) owners said they would like to improve their pricing. Whatever your company’s focus is, finding the correct prices for your products or services is essential.
Here are some common mistakes you should avoid when setting prices.
1. Don’t Base Prices on the Competition
It’s vital to understand your competition’s pricing, but it’s not something to use as a basis for yours. Other companies in your industry run their business differently, which means there are various costs, overhead and other expenses. These elements help competitors determine their pricing — use your own to help find the proper pricing for your business.
While you should not only consider your competition’s prices, you can certainly incorporate them into your strategy. This method is called competitive pricing and comes with some pros and cons.
However, you should not blindly change your prices because you think they need to match your competition. Although this is common in highly competitive markets, it’s not a long-term solution. Relying on their strategies can negatively impact your business.
2. Don’t Forget to Assess Your Customers’ Perception of Value
Customers consider their wants and needs when determining what they will buy. If you can address these requirements, they’ll likely make a purchase.
You must understand this buying process when determining your pricing. Customers will use the value of your product to figure out if they will purchase it or not.
Many customers use price as an indication of quality. If the price is higher, it must be because it’s a better-made product, right? When customers pay for something, they’re essentially “giving up” a portion of their earnings because the item seems worth the investment.
Companies can evaluate their products to understand how customers receive them. Focus groups are a perfect starting point. They allow business owners to hear feedback about peoples’ perception of the value of their products or services.
3. Don’t Try to Estimate and Set Random Prices
Some business owners will rely on what they believe is a reasonable price for their products. It’s recommended that prices be based on educated estimates.
Customers use their perception of value to decide if your product is worth buying. Sometimes, they will wonder how owners arrived at those prices and will ask for an explanation. If you assign prices randomly, it will be challenging to answer these questions.
For example, say you’re selling an antique vase for $100. Customers may ask what material it’s made from, whether it’s handmade or if it’s durable. All these questions are related to the product’s value.
If it’s durable, handmade and elegantly painted, customers will be more willing to spend the $100. If you’re unsure of these specifications, they may wonder why the price is so high. This will make them less likely to purchase your products.
Take the guesswork out of your pricing strategy. It could cause issues in the future with customer interactions and could make prices challenging to justify.
4. Don’t Make Sudden, Significant Increases
Surprising customers with major price increases can turn them away and cause them to turn to competitors. Consider doing some initial research to gauge how people will react to price increases.
Making small changes to pricing tends to improve your bottom line without making customers feel undervalued. They will notice more significant price increases, which will turn them away and lead to fewer sales.
For example, as opposed to a 20% price increase at once, consider making four 5% increases in the span of a few months. You could also try 10% increases, as long as the changes happen over some time. Making adjustments is a vital part of your pricing strategy. Sometimes, price changes fail to stick, which makes it challenging to adjust prices accordingly.
Why change prices at all? The economy can be volatile, and pricing is an implication of that.
Think about the oil industry and the price we pay for gas. Prices sometimes vary day by day. They rely on many factors, including market size, competition, costs of goods and demand.
5. Don’t Underestimate Your Costs
Estimate your expenses as precisely as you can to improve your pricing strategy. You likely know they add up quickly. Doing this will make it easier to determine how much you charge for products and services.
Consider using online resources to assist you in calculating your cost to do business. Utilizing a financial service to manage your company finances is also a good starting point.
To profit from what you sell, you have to charge higher than the cost of production and transportation. Remember to evaluate how much you spend to accurately estimate a price that satisfies your customers and improves your bottom line.
Avoid Pricing Mistakes with Your Products
Determining how to price your products may take some trial and error. Whether your business is brand new or running like a well-oiled machine, pricing can affect your profitability and the overall success of your operations.
Avoid these mistakes when you attempt to price your products or services. Be sure to consider your costs and overhead, competitors’ prices and the perceived value of your products to help you improve your strategy.
