In today’s most competitive world, companies are looking for various ways to increase their competitive advantage and improve their overall performance. Most of the companies have already resorted to cost cutting, outsourcing, process re-engineering and adoption of innovative technologies; however, their benefits from these actions are diminishing day by day. They are on the lookout of new strategies, and pricing is the most obvious one. Majority of the companies have already started recognizing this, and so they have started devising pricing strategies. Unfortunately, these strategies aren’t yielding the results they want due to certain errors that they fail to realize. Let’s talk about those errors now.
1) Prices based on costs: When the prices of the products are based on the cost of production, either the price end up being higher than the customers’ perceived value – pushing up the costs of sales – or, being lower than the perceived value – missing the opportunity of maximizing the profit. The bottom line is, the costs are irrelevant when it comes to pricing because they form a lower boundary for the price. The better strategy is to understand the perceived value of your products in the eyes of your customers.
2) Prices based on the marketplace: When you price your products based on the marketplace, you are bowing down to the collective judgment of the crowd about your product. Usually only those companies use marketplace pricing who are laid back about their business, ending up with thin profits. You should rather differentiate your products or services from your competitors.
3) Same profit margin across all product lines: Many financial strategies support uniformity in profit margins across all the product lines. However, this doesn’t work in the real world because each product line has a different set of target audience, and again, these potential customers have different perception about the price of the products. To put it simply, the price of any product line should reflect the target customer’s willingness to pay for that product.
4) Failure to segment customers: Usually customers are segmented into different groups according to your requirements and expectations from the product. The value proposition for products and services is different for different market segments, and hence the pricing strategy should reflect that. But when you fail to segment your customers, you are either overpricing or underpricing your products.
5) Constant prices for long time: Although changing prices on the daily basis doesn’t make business sense, it doesn’t mean that you hold the prices for your products at the same level for years to come ignoring changes in the costs, competitive environment and customer preferences. For better customer service and profit margins, you should update your prices at reasonable period of time and communicate the same to your customers to make sure that the value proposition on both the side matches.
To control the management costs and boost the sales, optimization of pricing strategy is a must. But this task can’t be done offhand. It requires lot of research and proper analysis of the gathered data. You need to tie the pricing strategy with the value perception of the customers. Until and unless this is done, you can’t win customer loyalty, lower cost of sales and enhanced profits.