The 7 worst pricing mistakes

Sometimes, just the tiniest change in pricing strategy can make the biggest difference — for better or worse.

Everyone knows that, now more than ever, buyers are sensitive to price. That’s why getting the pricing part of your business right is so important. Rafi Mohammed, author of “The 1% Windfall: How Successful Companies Use Price to Profit and Grow,” details the pricing mistakes you need to avoid to be successful today:

1. Using ironclad markups. The most common mistake in pricing involves setting prices by marking up costs (“I need a 30% margin”). While easy to implement, these “cost-plus” prices bear absolutely no relation to the amount that consumers are willing to pay. As a result, profits are left on the table daily.
2. Failing to capture value. Manhattan street vendors understand the principle of value-based pricing. The moment that it looks like rain, they raise their umbrella prices. This hike has nothing to do with costs; instead it’s all about capturing the increased value that customers place on a safe haven from rain. The right way to set prices involves capturing the value that customers place on a product by “thinking like a customer.” Do you take into account what your customers perceive — now — as worthwhile attributes of your product or service?
3. Offering unnecessary discounts. Many companies are uncomfortable setting prices above what they consider to be “fair” and are quick to offer unnecessary discounts, rather than charging what the market will bear or charging for the value of the product or service.
4. Offering initial discounts. Many people believe that offering a discount as an incentive to trial a product will lead to future full price purchases. That rarely works out. Offering periodic discounts serves price sensitive customers (which is a great strategy) but often devalues a product in customers’ minds. This devaluation can impede future full price purchases.
5. Using “one price fits all.” Customers are often interested in a product but refrain from purchasing simply because the pricing plan doesn’t work for them. While some want to purchase outright, others may prefer to rent, lease, prepay, or all-you-can-eat. Innovative pricing plans attract customers by providing ownership options, mitigating uncertain value, offering price assurance, and overcoming financial constraints.
6. Using “one product fits all.” One of the easiest ways to enhance profits and better serve customers is to offer good, better, and best versions. These options allow customers to choose how much to pay for a product. Think about it in the context of restaurants that offer early-bird, regular, and chef’s-table options. Price sensitive gourmands come for the early-bird specials while well-heeled diners willingly pay an extra $50 to sit at the chef’s table.
7. Ignoring differential pricing. For any product, some customers are willing to pay more than others. Differential pricing involves offering tactics that identify and offer discounts to price sensitive customers by using hurdles, customer characteristics, selling characteristics, and selling strategy tactics. For example, customers who look out for, cut out, organize, carry, and then redeem coupons are demonstrating (jumping a hurdle) that low prices are important to them.