One of the biggest challenges for any business is pricing. The common theme with most pricing issues is risk: set prices too high and you may push potential customers away; set them too low and you cut profits. Here are seven ways to avoid pricing mistakes.
1. Going in too low and undercutting all the time
This might be great for your top-line revenue, but it wreaks havoc on your bottom-line profit. You might not get business from price-conscious customers, but that’s OK. Your competition will, and they will have to figure out how to profit from the ‘price shoppers’.
2. Using the same margin for all products
There’s no rule, law or commandment that says all products need the same margin. In reality, slower moving items need higher profit margins. You can afford a smaller margin based on high sales volume.
3. Not knowing the difference between margin and mark-up
Margin is based on sales price, mark-up on cost. A client who didn’t understand the difference once offered a line of products with a 100% mark-up, then had a 50% off sale. He was essentially selling the line at cost.
4. Forgetting to take all costs into account
In order to price correctly every cost needs to be identified.
Even ‘little’ things like credit card processing fees.
5. Finding out what competition charges and doing the same
Instead of ‘following’ your competition, do a bit more homework and uncover the value you offer your customers. Then price for value. That way, you are in an excellent position to defend your price.
6. Setting sales commissions based on sale prices vs percentage of profit
For companies using a commission-based sales force, this is similar in scope to the margin/mark-up distinction. Profit is the only number that matters.
7. Discounting instead of adding value
At a 10% discount, a typical firm would need to sell 50% more units to keep the same profit on the bottom-line. Ask yourself if there is a way you can add value to your product or service by giving something away that won’t come out your profits
