Pricing is magic. There are no simple answers and no algorithms. Take into account your strategy, costs, competition, weather, and instinct. And stay alert with pricing, because change is constant.
Three Common Pricing Mistakes
Try to avoid these three most common mistakes in pricing:
Trying to be the lowest price provider:
Forget what you learned in economics class. The whole idea that lower price correlates with higher volume was based on commodities like coal. Today, while low-price and high-volume strategies still work, they are usually very capital-intensive and work only for very large national brands.
Startups and small businesses are much more likely to succeed by offering specific market segments (as in your core story) high value at a price premium.
Would you get a root canal from the cheapest dentist in town? Would you save money by buying two-day-old sushi? And why isn’t the cheapest car made the most popular?
I once lost a consulting job I really wanted when I bid $25k for it and a competitor bid $75k. The guy who gave me the bad news told me everybody liked my proposal, but they wanted the best, so they went for the higher price.
What would you rather have for dinner: a $1 hamburger or a $20 steak? We used to go to a restaurant that had really good food and surprisingly low prices. But I often wished they’d raise their prices so we didn’t have to wait 45 minutes or more to get a table. And guess what: they no longer exist. They went out of business. Do you think pricing had something to do with that? I do.
Mixing your pricing message:
Pricing is also your strongest marketing message. The gourmet restaurant with bargain prices is not credible. Claims of highest quality and best customer service, but also at the lowest price, aren’t credible. If you claim to have the best product, charge for value. People won’t believe you if you don’t.
Underestimating real costs:
Sadly, many businesses underprice themselves out of business. It takes profit to grow, marketing expenses to generate growth, and you have to generate enough money to cover fixed costs and working capital for buying inventory, waiting to get paid, and making mistakes.
Businesses go under when they run out of money. The research on these losses is confusing and ambiguous, and there are rarely single identifiable causes. Still, just betting on what I’ve seen with my own eyes through a lot of years, I think businesses frequently run out of money because they underestimated real costs.
Suppose you buy the widget for $2 and sell it for $6. That’s a gross margin of $4 and it seems like enough, right? Unfortunately, focusing just on gross margin isn’t enough. Aside from the $2 you paid for that widget, there are all those other expenditures, including your rent, your payroll, your insurance, your electric and water bill, all of your marketing costs, and lots of hidden costs, like the computers and software you’ll need to buy next year. We call that overhead and tend to forget it. Which is a shame, because a lot of businesses forget about it all the way to the business grave. You run out of money.
Use your thinking about pricing to go back and review your strategic action plan for your business offering. Does your pricing align with your product or service?