One of the biggest challenges facing manufacturers today, from startups to well established multi-nationals, is pricing and there are 7 common pricing mistakes made by most businesses.
Mistake #1: Basing your prices on your costs and not on customers’ perception of value.
Contrary to popular belief, your customers are not concerned about your costs. They are looking for a solution to their problems and they will pay a certain price in exchange for the outcome, the benefits and the value they receive from your products and services.
Using a cost-plus pricing model only, will result in you either
- over-charging or
- under-charging your customers
You will either lose the customer or leave money on the table. Cost-plus pricing is divorced from value and your cost structure may be quite different to that of your competitors, causing even more pricing issues.
Mistake #2: A one size fits all approach to pricing.
All customer needs are not equal and different customers will have different needs from your products. Geographically, prices will vary too depending on market dynamics and competitor landscape. By charging the same price to all your customers, you are destroying value by over-charging some customers and under-charging other customers. Some customers are looking for a no frills offering whilst others want to work collaboratively with you, and they are willing to pay a higher price for the additional value that they receive from you. The value proposition of your product or service differs across your customer base and segmenting your customers based on their needs increases profitability and reduces competitive intensity.
Mistake #3: Applying the same margin expectation to all your products.
Products and services do not all add the same value to your customers and therefore applying the same margin expectation will either adversely impact your sales or bring down the market price. Setting margin expectation for an innovative and differentiated product at the same level as a me-too product in a highly competitive market will not only destroy value, it will also reduce your profits.
Mistake #4: Not having a pricing strategy to deliver your Business objectives.
Very often pricing decisions are made very last minute and hastily based on little research or information. These tactical decisions fail to take into consideration the corporate and marketing objectives of your business. Strategic pricing supports your business in achieving its corporate and marketing objectives. Consideration must be given to customer needs, competitive landscape, how your product creates value for your customers, internal capabilities, costs and profitability. Your company cannot be everything to everyone and therefore you must be selective in which customers you choose to serve.
Mistake #5: Discounting prices.
So many companies grossly underestimate the adverse impact that sales price discounting has on their bottom line. Sophisticated buyers will always negotiate price downwards and attempt to devalue your offering. Rather than reduce your price, focus on adding value to your product. Sales can then engage buyers in a value conversation and reframe price discounts as a discount to value and take something off the table in return for that discount. The goal of your discounting policy must be clear and structured, and encourage and reward the desired behaviour from customers.
Mistake #6: Incentivising Sales on revenue alone and ignoring profits.
Sales behaviour is influenced by the incentive scheme that you put in place. If bonus is based on revenue alone, then Sales will focus on volume, and margin then becomes secondary. You will achieve your sales revenue target at the cost of much lower profits.
Mistake #7: Holding your prices at the same level for too long.
Many companies fear the reaction from their customers to price increases. However, ignoring customer needs, market dynamics and cost increases will adversely impact your profits. Businesses need to proactively manage Sales and customer expectations and behaviours around price changes. Annual price increases can successfully be implemented.
There is good news for manufacturers looking to optimize their pricing and profitability - these 7 mistakes can be avoided. Price must be viewed as creating and delivering value to your customers.
Neema Gray is founder and director of NVG Value Pricing, a pricing and product strategy consultancy helping Manufacturing and Engineering companies to improve their pricing and significantly grow profit.