Industry News | November 13, 2008

Top Ten Pricing Mistakes

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In tough economic times, revaluating product pricing is a necessity to keep your customers motivated. Determining what to cut and what to keep doesn’t always come easy when you’re personally involved with your products. Executive leadership company Vistage highlights the ten most common mistakes companies make when pricing their products.

1.) Basing prices on costs, not customers' perceptions of value--Pricing based on costs invariably leads to prices that are too high or too low.

2.) Basing prices on "the marketplace"--Management teams must find ways to differentiate their products or services to create additional value for specific market segments.

3.) Attempting to achieve the same profit margin across different product lines--For any single product, profit is optimized when the price reflects the customer's willingness to pay.

4.) Failing to segment customers--The value proposition for any product or service varies in different market segments, and price strategy should reflect that difference.

5.) Holding prices at the same level for too long, ignoring changes in costs, competitive environment and customers' preferences--Most companies fear the uproar of a price change and put it off too long. Savvy companies acclimate their customers and their sales forces to frequent price changes.

6.) Incentivizing salespeople on revenue generated, rather than on profits--Volume-based sales incentives create a drain on profits when salespeople are compensated to push volume at the lowest possible price.

7.) Changing prices without forecasting competitors' reactions--Smart companies know enough about their competitors to predict their reactions, and prepare for them.

8.) Using insufficient resources to manage pricing practices--Cost, sales volume, and price are the three basic variables that drive profit.

9.) Failing to establish internal procedures to optimize prices--The hastily-called "price meeting" has become a regular occurrence--a last-minute meeting to set the final price for a new product or service.

10.) Spending a disproportionate amount of time serving your least profitable customers--Know your customers: 80 percent of a company's profits generally come from 20 percent of its customers. Failure to identify and focus on these 20 percent leave companies undefended against wily competitors.

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