Unfortunately, pricing mistakes can be so dangerous that they can put you out of business. Here are five different pricing mistakes that are common amongst small businesses and some ways to fix them.
Pricing on Cost Rather Than Value
One major mistake small business owners make it to price based off of product cost rather than product value. If cost-based pricing leads to much higher prices than the customer believes the product is worth, sales will lag and eventual discounts will need to be implemented. Conversely, if the cost-based pricing leads to lower prices than the customer believes the product is worth, extra revenue is lost. The lesson is not to take a simple approach and price a product based on 2x, 3x, or 10x the cost. It’s smart to take the time to understand the product’s total value, as value and cost have practically nothing to do with each other.
Forced Profit Margin
Pricing a product based on a predetermined profit margin is a mistake. Profit margins evolve over time and can’t be directly forced just because of a pricing decision. The solution to this problem is to test prices and see which leads to the maximum profit margin. Try not to force a single number because you may be leaving money on the table.
Not Changing Price
Markets evolve, customer perceptions evolve, technology evolves, and so forth. If one thing is certain, the only constant in business is change. Being reluctant to change price can lead to disaster. Depending on your product, you might need to cut prices by 25% (or some other number) to remain competitive. Or, depending on possible upgrades to the product, a business may be entitled to increase price. The right thing to do is review the prices of all of your products on a monthly basis to ensure revenue is maximized.
Giving All Customers the Same Price
Often, giving all of your customers the same price is a mistake. Instead, it’s wise to classify customers into buckets, especially if your business is a service-based business. Not all clients are equal — some demand more and must be charged more. Tier your products and services, then tier your clients, and lastly tier your prices. Match them accordingly for the benefit of maximum revenue and the most efficient use of time. With that said, analyze your business to make sure that you aren’t spending the majority of your times on low-paying clients. If necessary, you can consider firing them so you can focus on the best quality and highest paying clients.
Paying Sales Commissions Based on Revenue Instead of Profit
This problem does come down to price — revenue is not the profit. Paying sales commissions based on revenue can be a costly mistake if the net margins are not in good order. As well, both revenues and net margins are affected by price. If a small business finds that it is paying out too much for commission costs, this issue should be looked into.