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Life Health > Running Your Business

Common pricing mistakes

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1. Companies base their prices on their costs, not their customers’ perceptions of value.

2. Companies base their prices on “the marketplace.” By resorting to “marketplace pricing,” companies accept the commoditization of their product or service.

3. Companies attempt to achieve the same profit margin across different product lines. Different customers will assign different values to identical products. For any single product, profit is optimized when the price reflects the customers’ willingness to pay.

4. Companies fail to segment their customers. Customer segments are differentiated by the customers’ different requirements for your product. Your price realization strategy should include options that tailor your product, packaging, delivery options, marketing message and pricing structure to particular customer segments.

5. Companies hold prices at the same level for too long, ignoring changes in costs, competitive environment and in customers’ preferences. Savvy companies accustom their customers and their sales forces to frequent price changes. The process of keeping customers informed of price changes can, in reality, be a component of good customer service.

6. Companies often incentivize their 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. Companies change prices without forecasting competitors’ reactions. Smart companies know enough about their competitors to forecast their reactions, and prepare for them.

8. Companies spend insufficient resources managing their pricing practices. Cost, sales volume and price are the three basic variables that drive profit. Most management teams are comfortable working on cost reduction initiatives, and they have some level of confidence in growing their sales volume. Many companies, however, only utilize simplistic price procedures.

9. Companies fail to establish internal procedures to optimize prices. In some companies, the hastily-called “price meeting” has become a regular occurrence. The attendees are often unprepared, and research is limited to a few salespeople’s anecdotes, and a financial officer’s careful calculation of the product’s cost structure across a variety of assumptions.

10. Companies spend most of their time serving their least profitable customers. While 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 wilier competitors.

Source: Dennis E. Brown and Per Sjofors, Atenga Inc.


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