The Seven Deadly Sins of Pricing

Pricing is crucial to business success. It is the reflection of the value you create, the story you want to sell. Pricing drives business revenue and profit, determines the future and acceptability of the product in the market, and quite literally translates into “how much is your creativity and effort worth?.” 

Meanwhile, to a potential customer it boils down to whether the product is worth their time and money. They make assumptions on what they are buying based on what they are paying. Despite this, 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 also provide a good framework on pricing mistakes you may be committing and how to stop. 

Lust

"We want it all - and we want it now!". If management cannot prioritise whether they want pricing to deliver more sales or more profit, they will most likely end up with nothing. This needs to be addressed in their pricing strategy. Be clear about the short term and long term goals. Identify and bridge the gap between pricing and profit vs pricing and sales. 

Gluttony

A simple price rule for a product, such as “5% below competitor X”, becomes excessively complex over time due to the inevitable addition of ad-hoc fixes. In no time,the rule can transform into: “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 the bonus target….” In the end, no one can say which rule drives prices and if it economically makes sense. With the one-size-fits-all equation, the very lack of customization can lead to a competitive disadvantage.

Greed

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. If done poorly, it can induce a negative impact and make customers more vigilant, or even suspicious. It can even sometimes snowball into a social media mess, tarnishing brand value. Understanding this is critical to success.

Sloth

Strategic pricing is the biggest advantage and key differentiator of a business. On the flip side, lazy pricing can be a silent killer of new products. It has been observed 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. The effort to build and implement a clear pricing plan can help companies extract full value of their products. 

Wrath

Price wars can be psychologically exhausting. In almost every scenario, the first move is based on price, and every retaliation is a price-cut that eventually transforms into a fully blown price war. When 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, you’re committing a sin of pricing.

The result is often a total erosion of profits in the market. That’s why it’s a good idea to consider other options, intelligently analyze the situation, assess the consequences of such an immediate change on product value, market, and customer segments which may even stop the war before it starts. 

Envy

Marketing, sometimes without a forethought, assumes their products are better than their competitors’ and that they can charge a premium when it is not advisable. We can all agree that reframing a price can influence the perceived value of a product and while people are largely irrational with their buying, businesses cannot have the liberty of being so. Charging a premium requires the right combination of research, timing, opportunity and strategy.

Pride

Change is inevitable. Pricing leaders often struggle with scattered data across their organization without a single point of truth. Technological innovations are enabling leaders to have better control over their pricing strategies. If a pricing manager prefers to assume that their pricing strategy is already optimal currently, and doesn’t leverage the potential and capabilities of innovative revenue management solutions like buynomics, they might fall behind.