Pricing is crucial to business success. So why do so many companies get it wrong? Maybe we can provide a time-tested answer to this conundrum. The 7 deadly sins not only make good movies, but they also provide a good framework on how things go wrong. Here is our take on the 7 deadly sins of pricing:
“We want it all – and we want it now!”. —If management cannot decide if they want pricing to deliver more sales or more profit, they will likely end up with neither. This needs to be addressed in their pricing strategy.
A simple price rule for a product, such as “5% below competitor X”, becomes excessively complex over time from the addition of ad-hoc fixes. The result becomes something like: “5% below competitor X, but no more than 10% above competitor Y, unless it would then be cheaper than the base version or sell below 15% margin, unless we are within 5% of bonus target….” In the end, no one can say which rule drives prices and if it economically makes sense.
Managers assume that prices are inelastic, and that customers will not react to a price increase. In the real world, there will almost always be a demand reaction to a price increase. Understanding this is critical to success.
It comes in many forms: simplistic price rules like ‘cost-plus’, undifferentiated price increases, high discounts to avoid negotiation; in all of these cases, it pays to go the extra mile.
A competitor underbids you and you instantly engage in an all-out price war instead of staying calm and preparing a targeted and measured response. The result is often a total erosion of profits in the market.
Marketing mistakenly assumes their products are better than their competitors’ and they can charge a premium when they cannot.
If a pricing manager thinks that all prices are already optimal the way they are, they may believe that there is no need to consult the buynomics pricing software. This certainly leaves money on the table!