I’ve had approximately 10,000 conversations on pricing over the years.
The gist of my advice is set your prices more intelligently, don’t discount, and hold the line on pricing.
In having 3 conversations about pricing in the last 24 hours, I thought I might lay out a few of my guidelines on pricing. Here are 10 of them.
- Don’t Discount:
That’s the foundation.
Discounting is like the crack cocaine of pricing.
And, it opens the door to more discounting which undermines your brand. In Martin Lindstrom’s research, he showed that discounting opens a door in your market’s head that you can’t close for almost a decade saying, “This is a discount brand.”
2. Most bad pricing decisions are failures of strategy:
If I had to point to one reason folks struggle with their pricing, I’d say it has everything to do with bad strategy.
Is that too simplistic?
Probably, but start with strategy and work to tactics.
3. Most businesses start with pricing too low:
This will be an odd statement considering I do recognize how out of line the pricing for things like tickets and concessions at games are, but in most cases most prices are set too low to begin with and the difference in revenue and profits is attempted to be made up for by volume.
4. Value based pricing is the king:
You should be pricing based on the value the customers you serve are receiving, not some other formula that amounts to sticking your finger in the wind.
5. COGS plus is a stupid way to price:
Cost plus pricing is stupid because it kills market orientation, doesn’t capture your value, often doesn’t reflect the true cost of a product or service, ignores segmentation, and leaves money on the table.
6. In pricing perception is reality:
There are brain studies that show that you can serve someone the same wine and by telling the person drinking the wine that it is $10 versus $100 that different pleasure centers in the brain will light up.
Perception is reality.
7. Being able to improve your price is the key to driving profits:
A 1% increase in price drives, on average, a 10% increase in profits.
Compare that to improving sales 1% which drives a 3.3% growth or cutting 1% of costs which drives a 2.5% increase in profits and you see the importance of getting your price right.
8. Poor pricing practices create commodification:
This gets down with discounting, but if you have a poor pricing structure you run the risk of commodification of your product or service.
9. The pricing thermometer method helps you understand pricing better:
You need to understand price floors, price ceilings, perception, COGS, and other ideas. Using a price thermometer can help you visualize the real pricing dynamics.
10. Hold the line:
Set a price based on data, testing, and wisdom.
Don’t be bullied into setting it too low or too high and discounting afterwards. Set a good, fair price and hold the line on your pricing.
Pricing is the most powerful tool you have to capture the value your business creates.