In this article we will talk about:
- How Pricing Strategy Can Change Your Business
- 6 Most Common Errors in Your Pricing Strategy
- How to make your pricing
See also: Sales Price Formation Manual
No one has any doubt that the price of a product or service is crucial to good sales volume at the end of the month, but currently few businesses understand that setting a pricing strategy solid can be the difference between making lots of sales, having constant high price complaints or even mistrust by applying a very low price.
Regardless of the reality that your company faces today, starting to develop or refine your pricing strategy is essential to achieve better sales levels and confidence of your customers.
To get there at that time, ideal price formation is a crucial step in running any business. In this sense, it is worth knowing and avoiding some common mistakes that I have seen (and I see) happening repeatedly in several companies.
1 Error - Selling for a price below your costs
Most managers I know end up pricing their products or services with values above their direct costs, but they do not always stop to analyze whether the contribution margin (difference between price and direct cost) will be sufficient to cover fixed costs. Math is very basic, you just have to account for your direct costs.
Let's look at an example of a consultancy that will do a survey project and cost analysis in a company. In this case, some of the direct costs for the realization of this project are:
- Labor (consultants)
- Transportation costs
- Food expenses
- Use of contracted system for this project
They could be shown as follows in our worksheet for pricing services:
In this case, our total cost was R $ 29.931,56, that is, if we sell this project for any amount greater than this we will have reached our minimum necessary selling price. This is where most managers end up neglecting and accepting this form of pricing. The problem is that only reaching the minimum cost is not enough.
All leftovers (sales price higher than your direct costs), which is called the contribution margin, will help you to calculate the break-even point and find out exactly how many projects of this kind you will need to sell in order to have no loss. With this number you can even think about whether it is possible to produce the quantity of products needed to reach the break even point. If you want to know more about this method, I recommend our post how to calculate the break-even point of your business.
2 Error - Pricing just by looking at your costs
This error often comes from a single, direct look at costs. As I mentioned in the previous topic, looking at your costs is essential but unfortunately it is not enough on its own and what I am talking about is about the perception of value your customer has of your product or service.
Basically, there are two paths when you place your price based solely and exclusively on costs:
- the customer's perception of value is less than their price - in this case, their customer finds their product or service expensive for what is being offered and does not buy or asks for discounts to buy, reducing their luvratividade.
- the customer's perception of value is greater than their price - in this case, the customer finds their product cheap and buys without barter, but you stop making more money by not having a higher price that would still be accepted by your customer.
Last but not least, the winning process of a pricing strategy involves looking at costs, what your customer thinks of your product or service, your competitors, and other variables.
3 Error - Pricing looking exclusively at your competition
Talking about competition, although it is important to look at those who sell products or services similar to yours, the idea is that they are not the only predictors of your pricing strategy, after all, your competition prices according to their criteria, which are likely to be different from yours. Here is an example of comparing competitors we use in our pricing sheet for services:
In this case, all competing 3s have cheaper prices than the reviewed company, but that does not mean anything, because if the level of service, service, and delivery of that company is higher, it may be worth paying that extra value.
Some examples of such cases are the Mac versus traditional computers, the LUZ spreadsheets against free spreadsheets on the internet, branded handbags against trade fair bags, etc. Basically what I mean is that just looking at the price of competitors will not help you differentiate yourself.
If you want to do a value analysis, I strongly recommend that you make the value curve of your business and to understand a little more of the subject, we wrote a post explaining what is and what is the value curve (strategy canvas).
4 Error - Give discounts without criteria
Another mistake that is made with a certain frequency is that of giving discounts desperately thinking that this will solve some problem of lack of sales. This is not true, to be honest, most of the time low-priced and up-to-date rebates can even help in the short-term, but it's not a long-term pricing strategy.
If you give discount to anyone who asks, in a short time you can get your customers badly accustomed and they will all want rebates forever regardless of what you do. A very emblematic example that I have is Udemy (which is an excellent platform for online courses), but they give discounts weekly.
Basically, after subscribing to their mailing list, I received almost weekly opportunities (sometimes even more often) for discount opportunities in almost every course. This meant that I only started to take courses when they went into a discount, making my average ticket as a customer of them reduce absurdly.
Anyway, each case is a case and, as they are a marketplace, it may even make a little more sense to this strategy, but I still think that you need to be very careful about excessive discounts and, whenever you offer discounts, determined for the discount to end, so your customers will know that they can not always be asking for a discontinuity here and there.
5 Error - Keep the same price for a long period of time
This error ends up happening mainly in moments of crisis or of weak sales. Usually when your sales are not the best, an entrepreneur or manager may not like the idea of raising prices, as this can influence the amount of sales of the company.
If this scenario remains long enough and it is averse to this change, its selling price will remain the same as its costs increase periodically, either with inflation or price increases of same suppliers, making the profit margin of the business will gradually plummet.
In addition to this gradual problem of margin loss, when you change the price, you will probably have to make a bit more abrupt change, which can consequently be felt more negatively by your customers.
6 Error - Keep promises made to your customers
To close the most relevant pricing strategy mistakes, you can not forget to keep what you promised and the price is a promise you make to your customer. You can not imagine how badly it takes to make promotions and price changes in a very short period of time.
A classic mistake that has been occurring in recent years is in relation to promotions on specific special dates. Some cases of how to make a bad pricing strategy occurred on Black Friday here in Brazil, when several companies "invented" promotions that did not exist. See if the image below does not remind you of anything ...
I think the most important thing is to take great care not to fake discounts and to let people understand that the price may be different from what is stated with a simple request.
If I could tell you the path I most like to use to make a pricing would be this:
- Step 1 - Cost analysis of your product or service
- Step 2 - Competitor Price Comparison
- Step 3 - Understanding perceived value by customers
- Step 4 - Definition of product markup and sales price
- Step 5 - Definition of contribution margin
- Step 6 - Fixed Cost Analysis
- Step 7 - Setting Your Break-Even Point
I hope you have understood the basic steps to make the pricing of your product or service, what are the main mistakes of price formation and be careful when making yours.