7 Costly Pricing Mistakes That Can Tank Your Sales
Getting your pricing strategy right is one of the most important yet challenging aspects of running a successful business. Price your products too high, and you risk driving customers into the arms of competitors. Price too low, and you leave money on the table while struggling to cover costs.
It‘s a delicate balancing act – and one that many companies fail to get right. In fact, studies have found that a staggering 85% of companies have significant room for improvement in pricing. Poor pricing practices cost businesses an estimated 1-2% of potential revenue each year.
Why do so many organizations stumble when it comes to pricing their offerings effectively? Often, it comes down to falling victim to common pricing pitfalls and mistakes. Here are seven of the most damaging pricing errors to watch out for.
1. Fixating on Undercutting Competitors
Many businesses fall into the trap of thinking that the path to pricing success is simply offering the lowest price in the market. They become laser-focused on undercutting competitors‘ prices, even if it means slashing their own margins down to the bone.
However, pricing experts warn that this "race to the bottom" is often a losing strategy, especially for small businesses that lack the economies of scale to make razor-thin margins work. While offering the lowest price can be effective for commodity products, most businesses are better off focusing on communicating the unique value they provide relative to competitors.
As pricing consultant Jon Manning explains, "Unless you are Walmart, you are unlikely to be able to profitably win a price war. Focus instead on providing a clearly differentiated product at a price that communicates the value you provide."
2. Failing to Segment Customers
Another common pricing blunder is treating all customers the same and using a "one-size-fits-all" pricing model. In reality, different customer segments often have very different price sensitivities and willingness to pay.
By failing to segment customers and tailor pricing accordingly, companies leave significant money on the table. Research by McKinsey & Company found that a 1 percent price increase would deliver an 8.7 percent increase in operating profits if demand remained steady. However, that same study found that up to 30 percent of the thousands of pricing decisions companies make every year fail to deliver the best price.
The key is to develop a deep understanding of your various customer personas and what each values most. Some may be highly price sensitive and only willing to pay rock-bottom prices. Others may be more than happy to pay a premium for a high-end product, stellar customer service, or other value-added elements. The most effective pricing strategies account for these nuances.
3. Presenting Prices in a Confusing Manner
Even if you land on the "perfect" price for your product, the way in which you present that price to customers can have a big impact on how it‘s perceived. Behavioral economics research has shown that even small tweaks to how prices are displayed can dramatically impact demand.
One common finding is that prices with more syllables when spoken aloud are perceived as being significantly higher than prices with fewer syllables, even when the actual numerical price is the same. For example, "$1,499.00" is perceived as a higher price than "$1499", even though they are technically equivalent.
To avoid this, keep pricing displays as simple and straightforward as possible. Avoid unnecessary complexity, and use round numbers rather than numbers with excessive digits after the decimal point. A simple "$99" will generally be better received than "$99.99".
4. Emphasizing Money Over Experience
Brands often make the mistake of focusing their marketing purely on cost savings and "bargain" messaging. But behavioral research has found that customers tend to base purchasing decisions more on the memorable experiences a product provides than on saving a small amount of money.
For example, a study by Stanford professor Jennifer Aaker found that when consumers were asked to recall a time they used a particular product, they focused overwhelmingly on the experience and personal connection it provided, not on the money they saved.
This insight can help guide pricing and promotional strategies. Rather than defaulting to generic "Prices slashed!" messaging, emphasize the valuable experience and results customers will gain by purchasing the product, even if it comes at a slight price premium. As the saying goes, "price is what you pay, value is what you get."
5. Keeping Prices Stagnant as the Market Evolves
Markets are always in flux – consumer trends shift, new competitors emerge, and the economic landscape is constantly evolving. Businesses that fail to adjust their pricing to keep pace with these changes can quickly fall behind.
Of course, implementing a price increase is often an anxiety-inducing prospect, as no one wants to risk alienating customers. But when input costs are rising and market dynamics have changed, sticking stubbornly to an outdated price point can be financially unsustainable.
The key is to have a pulse on the market and maintain some level of pricing flexibility. While you don‘t want to change prices at the drop of a hat, an annual price review and adjustment is generally advisable. And framing any price hikes in terms of the increased value you now provide can help them go down smoother with customers.
6. Demanding Uniform Margins Across All Products
Many multi-product companies stumble by insisting on a standard profit margin across their entire product suite. For example, if the overall gross margin target is 50%, they‘ll price every product to deliver a 50% gross margin.
The problem is that different products have different price elasticities. Customers may be willing to pay significantly more for some products than for others, based on factors like brand loyalty, feature sets, switching costs, and more. By pricing everything based on a static margin target, businesses end up underpricing some offerings while overpricing others relative to what the market will bear.
A more sophisticated pricing method looks at each product individually and prices it based on market demand and the unique value it provides. Some high-demand "hero" products may be able to command lofty margins, giving you more wiggle room to keep prices and margins lower on other products if needed.
7. Neglecting the Broader Pricing Context
Finally, far too many companies develop pricing strategies in a competitive vacuum without considering the broader landscape. The reality is that a price change from one company can set off a domino effect of pricing adjustments from other industry players.
Before moving forward with any major pricing changes, it‘s critical to think through the competitive dynamics and how your actions might spur responses from rivals. If you cut prices, will competitors follow suit? If you raise prices, will they keep prices stable in an attempt to steal market share? Wargaming these scenarios ahead of time is crucial.
It‘s equally important to align pricing with overarching business goals and strategy. Sustainable, profitable pricing requires input and buy-in from departments across the organization, from sales and marketing to finance and product development. Pricing should be a core element of the overall go-to-market strategy.
The Bottom Line
No business sets out to make pricing mistakes. But far too many organizations stumble into these common pitfalls, resulting in lackluster sales, eroded margins, and confused customers.
By steering clear of these seven pricing mistakes and following proven best practices, you can develop a smarter pricing strategy that boosts both revenues and profitability. It requires a keen understanding of your customers, market conditions, and the unique value you provide. But getting pricing right is one of the most powerful levers you can pull to drive growth.
If your sales have hit a plateau, consider whether you might be making one of these common pricing mistakes. By identifying these errors and course correcting quickly, you can get your business back on track and set the stage for long-term success.
