I was sitting staring at a menu pricing board the other day and suddenly a thought struck me. This business is making a really common pricing mistake and it’s costing them. You see they’d priced their Sunday Carvery at £9.59 which seems a fairly reasonable price but if you’ve read my blog on ‘Charm Pricing’ you’ll know that people read from the left to right paying most attention to the first digit and then less and less attention for each subsequent digit.
In this case, most people would interpret £9.59 as nearly £10 and move on, that price will either attract them or repel them. So it would not make a jot of difference to the prospective customer if this business had listed the price as £9.99. Ok, so you’re thinking well what’s the 40p difference going to make on each sale to the business?
Well, when you understand that most restaurants and cafes have a fairly standard pricing strategy based around 3rds. A 1/3rd of the cost will be the plated costs of the ingredients, the next 1/3rd will cover the overheads and staffing cost and the final 1/3rd will be the potential profit. This means that this business is expecting to make approximately £3.20 on each meal sold. So a 40p price increase would go straight to the bottom line, increasing the profit per meal sold to £3.60 or an 11% increase with no change in costs. Would you turn away an 11% increase in profit? This business is.
This is not the only pricing mistake I’ve seen, here’s a list of 7 of the most common mistakes companies make when pricing their products and services.
Mistake No. 1: Basing prices on costs, not customers’ perceptions of value.
Customers choose the price they’re willing to pay based on the value that they perceive they will receive from a product or service. Prices based on costs invariably lead to one of the following two scenarios:-
1) If the price is higher than the customers’ perceived value the cost of sales goes up (if it happens at all), discounting pressure increases (leading to reduced prices anyway) and sales cycles are prolonged.
2) If the price is lower than the customers’ perceived value, sales are brisk, but businesses are leaving money on the table, and therefore are not maximizing their profit.
Mistake No. 2: Using standardised profit margins across all product lines.
Whilst it would appear to be a financially sound strategy to drive for uniformity across disparate product lines. The iron law of pricing is that different customers will assign different values to identical products. For any single product, profit is optimised when the price reflects each customer’s willingness to pay. This willingness to pay is a reflection of his or her perception of the value of that product, and that can change depending upon numerous factors. One way to take advantage of different valuations is to use a differential pricing strategy, many hotels use this strategy, they’ll offer the same room for the same day at different prices based on, a drop in price, an online price, a discount club price (such as the motoring organisations), an OAP price, the time of the day etc.
Mistake No. 3: failing to segment their customers.
Customer segments are differentiated by the customers’ different requirements for your product. The value proposition for any product or service is different in different market segments, and your price strategy must reflect that difference. Your price realisation strategy should include options that tailor your product, packaging, delivery options, marketing message and pricing structure to specific customer segments, in order to capture the additional value created for these segments. For example, our hotel in the previous example could have:-
The Romance Package (includes a suite and a romantic meal for two)
The Seniors Package (lower rates for OAPs and seniors at unpopular times)
Luxury Seekers Package (Higher end suites for those wanting that bit extra)
Mistake No. 4: Failing to increase prices for too long.
Most businesses fear the uproar of a price change and put it off as long as possible. I’ve actually worked with a business that had not increased their prices for 15 years, yes 15 years of reducing profits. The most
switched-on of businesses accustom their customers and their sales forces to frequent price changes. Marketplaces change radically in a short period of time. It’s important to recognise that the value proposition of your products changes along with changes in the marketplace, and you must adjust your pricing to reflect these changes. Check out my blogs on how to raise your prices without losing any customers.
Mistake No. 5: Incentivising your salespeople strictly on revenue.
So your salesperson comes back to the office and says they’ve made a great sale but when you look at the numbers you’re going to make nothing on it. The problem is that volume-based sales incentives create a drain on profits when salespeople are compensated to push volume, even at the lowest possible price. This mistake is especially costly when salespeople have the authority to negotiate discounts. They will almost always leave money on the table by selling lower-priced products and dropping prices to “clinch the deal.” Incentivise your salespeople on the profit element of the sale.
Mistake No. 6: Basing your prices on “the marketplace.”
By resorting to “marketplace pricing,” and by marketplace pricing we mean looking at what everyone else is doing and pricing accordingly. This has the effect of commoditizing their product or service. Marketplace pricing is a resting place for businesses that have given up, and where profit margins end up being razor thin. Instead of giving up, these businesses must find ways to differentiate their products or services so as to create additional value for specific market segments. Start by reading my blog on understanding your value proposition.
Mistake No. 7: Relying on uncertain methods of pricing intelligence.
Your salespeople or your customers are not the best people to inform you about pricing intelligence. Such people are an uncertain source, because their information-gathering methodology is often haphazard, and the information obtained thereby can be purely anecdotal. A customer will rarely tell the “complete truth” to a salesperson. Savvy businesses employ trained professionals to collect and analyze the data to identify and evaluate the value perceptions of their marketplace.
Pricing offers many businesses the most direct route to higher profits, yet particularly in the UK, the pricing function often fails to get sufficient attention. This is why so many pricing mistakes happen.
Make sure you check out my other blogs on pricing and check out the pricing mastery course here (just hit the button to find out more).