Top 6 Pricing Mistakes
Steer clear of these common pricing errors.
A sound pricing structure helps companies generate sales andbuild customer loyalty. The wrong pricing structure can leavebusinesses struggling to service customers and reach profitability.When you need to determine what to charge for your products andservices, steer clear of these common pricing mistakes.
Underselling
To set realistic prices, you need to be aware of all costs involvedin producing your product or service. This includes easy to trackcosts such as the price of parts and supplies, as well as lesstangible costs associated with the skills and knowledge you bringto the table. Some entrepreneurs set prices that do not account forall of these expenses. They may forget to add in overhead such asutilities or rent, or have difficulty putting a price tag on thevalue of their time. One approach service-based businesses use todetermine a fair rate for their offerings is to set an hourly wageto charge for services. They then multiply this figure by the totalnumber of hours it takes to complete a job to determine aproject's overall price.
Following the competition
Basing your pricing structure on the competition's can bedangerous because the costs competitors use to calculate prices mayhave little relation to your own. They may pay suppliers less ormore than you do, buy different technology, and have larger orsmaller marketing budgets. That said, it does pay to know how muchcompetitors charge so you can confirm that your prices arerealistic for the market. If you notice your figures are much lowerthan competitors', check to be sure you haven't leftsomething out of the pricing equation.
Competing on price
Setting prices solely to beat the competition is a shakyproposition. You're bound to attract buyers this way, but theyare unlikely to be loyal customers. If low cost attracted them toyour business, they may abandon your company when a less expensiveoption comes along. A better approach is to differentiate yourbusiness from competitors in other ways, such as superior customerservice, enhanced product features, or finer quality.
Waiting too long to raise prices
Increased demand or the rising cost of supplies may put you in theposition of having to decide whether or not to raise prices. Somebusiness owners avoid increases because they fear customers willreact negatively. In many cases it's a better strategy to makeregular, small price increases than to hit customers with one largeincrease. In other words, a 10 percent price increase is likely todraw more negative attention than two 5 percent increases.
Dropping prices without changing delivery
Some clients may try to finagle a better deal from your company.This can put you in a difficult position, especially if you run aservice-based business. Delivering an agreed-upon order for a lowerprice can inadvertently send the message that your initial priceswere too high, and all future business is open to pricenegotiation. A better approach is to agree to a lower price, butchange the delivery terms slightly. For example, if you'renegotiating the price for a three-month long technicalinstallation, you might agree to a lower project cost if the numberof weekly meetings is reduced or monthly reports are streamlined.Another option that makes sense for large orders is to positionlower rates as volume discounts.
Setting random prices
Some customers may insist upon having an understanding of how yourpricing structure is designed, so it is critical to be able tojustify the prices you charge. In addition, unless you have a clearsense of how costs relate to your prices, it will be difficult foryou to identify when the right time is to adjust the amount youcharge.
The viewsand opinions contained herein are not necessarily those of AmericanExpress and are intended as a reference and for informationalpurposes only. Please contact your attorney, accountant or otherbusiness professional for advice specific to yourbusiness.
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