Pricing Mistakes People Make

With all things financial in a state of flux, you will probably be wondering if your pricing is right. You may well be right to wonder. The majority of businesses still set their prices based on their costs. They shouldn’t. If this was the best approach, perfume would cost the same as fly spray and a Mont Blanc Meisterstuck cost little more than a ball pen from Baron Bic.

I’m not advocating that all prices should be set at the premium levels achieved by luxury goods manufacturers, but very few businesses should set their prices based on costs alone. Here are some of the mistakes and misperceptions from which people suffer:

Cost plus
Looking at ‘value’ from your own perspective, not your client’s; it cost me £70 to make, I need to make a 30% gross margin so I’ll price it at £100.

The market sets the price
My competitors sell at between £4,000 and £5,000 so I’ll keep within that range.

It’s a matter of simple arithmetic
This will save my client 10% of his £100,000 p.a. fuel bill, so I’ll charge £10,000.

It’s a lottery
Financially, buying a lottery ticket is a mug’s game. So why do so many tickets sell each week? The odds are 13,983,816 to 1 of winning the jackpot and under 2% of winning anything at all. On average you would have to live 38,417 years to win the jackpot and you might win a prize of some sort once a year.

Breaking even is a dream for most. But ‘dream’ is the clue: buying a ticket for £1 for an average return of 0.00000715p is financial folly. But buying a ticket for £1 with the Sunday newspaper for the following Saturday’s draw isn’t so stupid: some people would view this as quite a reasonable price for almost a week of being able to dream about what they’d do if they won.

Profiting from value
As we see from the National Lottery, value is sometimes a difficult concept. Indeed many of their customers may not even consciously understand why they buy a ticket each week.

Setting prices at the right level can be crucial to a business’s success. Neither should prices be set in isolation. You need to tailor what you sell to deliver the maximum perceived value to your clients. Value can be established in terms of product features, commercial terms or other aspects of your offer to market. What is certain is that most businesses, even those that adopt the philosophy of value based pricing, find it difficult to be objective without external help.

As the “nasty” decade gets underway, however shallow the recession proves to be, your prices will come under pressure. Now is the time to be certain you’ve got this right and be prepared to make your customers love you for the value you deliver to them.

If you are interested in improving the value you deliver, contact Simon Breese.

Editor’s note: so far Simon has made over 300% return by playing the lottery ... he played for three weeks, won £10 and now gives direct to charity. His revelry is derived elsewhere.