9 Ways Your Pricing Strategy Sucks
Why do I want to talk about pricing? There is a disease called “Price Discounting.” It is like heroin. It will kill you and your business. Let me give you an example to explain this:
You make a 40% gross margin. You decide one day to reduce your prices by 6%. That means that you now have to increase your gross sales by 50% to make the same gross profit. Now that is just insane, but that is what occurs in the market place.
Especially in time when there is fear, anxiety and sales restriction. People get gun shy. They play Russian roulette with their own business. Businesses go broke because they do not sell in their market; they do not understand the implications of pricing; they mistake turnover for profitability and they grow their sales and wonder why they are not making any money.
So here are the nine reasons why your pricing strategy could suck:
1. You price by a textbook formula or an industry norm.
Many organizations, retail industries in particular, will buy a product and then simply mark it up by a margin such as 30%. You should not mark up the product based on the cost price. Rather, you should determine the price of a product based on the value you can get in the marketplace. The value is what determines the pricing, not the cost.
Many organizations have algorithms and all they do is buy product and they put a margin onto it. That is how they work out their price. That is insane. You may be able to maximize more out of that particular product because the market may be willing to pay more for it.
2. You have an excessive concern about your competitor's pricing.
You are fiercely paranoid. You have a whole sales team that continues to tell you that you are too expensive. You are looking at your competitors and using them as a benchmark. The reason you are doing that is because you have not articulated your unique selling position. You have not promoted your unique benefits. So, your customers tend to focus on price.
3. You attract customers who buy on price.
Retailers are always focused on having “sales”. The question is when is the product not on sale? If I spoke to a retail executive right now and asked him what is his biggest frustration, I could guarantee that he would say that it is the fact that everybody wants a discount.
In the ancient scriptures, there is a principle that says “What you sow, you will reap.” If you sow that you are always on sale, what type of customers are you going to attract? We do it all time and then we complain about the result, even though that result was what we were focusing in on.
4. A predetermined belief that is all they will pay.
This happened to me. I am in consulting and coaching and occasionally I would look at a person or a business and say, “That is all they can pay.” So that is how I would price my services. It is really important that you break the mindset of not what they can pay but rather what they perceive the value to be.
5. You allow apple to apple comparisons.
So much of marketing is about branding uniqueness. Your uniqueness does not have to be in your product alone. It can be your delivery or your service - it is the total package.
You want to create mystery. Where there is mystery, there is margin. That is why you need to be so good at marketing and selling. In many ways marketing is the device you use to create that mystery. Your sales process should also be designed to create that mystery.
The greatest disease that is affecting the retail business right now is the “commoditization.” Do you know what “commoditization” is? It is the customer's perception that they can buy the same product, the same brand and the same size overseas for 50% less. That is an apple to apple comparison. In the past, before the internet, they could not get that information. Now, they can just put your product name into Google and search for “cheapest price.” You should see the results that they will get. So, it is really important that you create differentiation.
6. You have created no differentiation.
This is simply an extension of number five. If you cannot create that differentiation and you are in a commodity based business, you have two options. You can either reduce your costs or get out really quickly. It is a very vulnerable industry to be in.
7. You do not offer premium price options.
I am a firm believer in the “good, better, best” philosophy. I am also a firm believer that when I pitch you the best possible product, I should start with the best because once I am in the gutter, I cannot get out.
If you have three models, some people will go for the one in the middle because they think that the one has got some of the good stuff of the top model but basically not as “cheap” as the lower model. But if I only offer you one model, guess what they buy? Only that one model and there is a greater likelihood that they will even want a discount on that lowest model. That is not bright.
8. Ignorance or stupidity about business math.
Earlier I explained a 40% margin with a 6% discount requires a 50% increase in sales. A lot of business owners do not understand how discounting affects their business. They have no understanding about how much additional turnover they have to create just to make the same amount of money. If there is a labour cost associated with that turn over, then the labour costs are actually going to increase the need for sales even more.
9. Poor self or business esteem or feelings of not deserving more.
I remember speaking to a business owner who had not increased their prices for 10 years. The greatest single barrier to him increasing his prices was not the quality of the product or his services but rather it was him. He felt that if he increased his prices, no one will buy. Not only that, but he also had sales people who reflected that philosophy because they were just order takers. We finally convinced him that if he did not at least increase his prices by the rate of inflation (CPI) each year, he was really going backwards. He therefore increased his prices in two increments of 2.5% and he did not lose one customer - not one. The only issue that was holding his pricing back was himself.
Pricing is a huge issue. It is a larger issue now than it has ever been in the past. When markets are tight, there is a temptation to actually reduce the cost of your products to win business. I would strongly suggest that you resist that. Do not follow the herd because, most of the time, the herd is going over the cliff. Have a blue ocean strategy where you set your own pricing. Understand that if you enhance your selling and marketing, your pricing can actually go up.
ABOUT ACHIEVERS GROUP
The author is founder and Chief Energy Officer of Achievers group. He is a much in demand passionate professional speaker, business educator, author and corporate and business advisor. He has worked with over 170 businesses around the world.
Website: www.achieversgroup.com.au
Email: tony@achieversgroup.com.au
Phone: 0410 538 521
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