The Top 10 Common Pricing Mistakes Most Companies Make

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 the price strategy must reflect that difference. Your price realization strategy should include options that tailor your product, packaging, delivery options, marketing message and your pricing structure to particular customer segments, in order to capture the additional value created for these segments.

Mistake #5: Companies hold prices at the same level for too long, ignoring changes in costs, competitive environment and in customers' preferences.

While we don't advocate changing prices every day, the fact is that most companies fear the uproar of a price change and put it off as long as possible. 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. Marketplaces change radically in a short period of time. It is important to recognize that the value proposition of your products changes along with changes in the marketplace, and you must adjust your pricing to reflect these changes.

Mistake #6: Companies often incentivize their salespeople on units sold or revenue generated, rather than on profits.

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: (1) selling lower priced products, and (2) dropping prices to "clinch the deal." When their "job" is to get the deal, regardless of profitability, salespeople will do exactly that. And, as a result, your profitability will diminish. Companies need to redefine the salesperson's "job" as maximizing profitability, and incentivize profitability, while also providing the salespeople the necessary "tools" to do so. These tools include information on profitability on each of the products your company sells, strict control of the awarding of discounts, and alternative choices and configurations to enable the salesperson to manage the inevitable negotiation about price.

Mistake #7: Companies change prices without forecasting competitors' reactions.

Any change in your prices will cause a reaction by your competitors. Smart companies know enough about their competitors to forecast their reactions, and prepare for them. This avoids costly price wars that can destroy the profitability of an entire industry. Savvy companies understand that any significant lowering of your price - which may drive increases in volume - will provoke a reaction from your competitors.

Mistake #8: Companies spend insufficient resources managing their pricing practices.

There are three basic variables in a company's profit calculation: cost, sales volume and price. Most management teams are comfortable working on cost reduction initiatives, and they have some level of confidence in growing their sales volume. But good price setting practices is seen as a "black art." Consequently, many companies resort to simplistic price procedures, while the same companies use highly sophisticated procedures and technologies to track and control their costs in minute detail and in real time. Likewise, companies may confidently forecast what effect marketing campaigns and "the number of feet on the street" have on sales volume. Managers feel comfortable with these two hard data sets. Therefore, they spend nearly all their time on the issues of sales volume growth and cost control, overlooking the vital role of pricing strategy. They erroneously believe that pricing is not important, or that hard data and rigorous methods are not available to enable them to control pricing. In fact pricing is of outmost importance, and a key element of the marketing mix. Good pricing strategies use hard data generated by modern methods such as Value Attribute Positioning, Conjoint Analysis or Van Westendorp's Price Sensitivity Meter, to generate accurate hard data on the perceived value of a product or service, thereby enabling mangers to maximize their profits by optimizing their prices.

Mistake #9: Companies fail to establish internal procedures to optimize prices.