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In the 1997 Australian movie The Castle, Dennis Denuto (played by Tiriel Mora) was the incompetent lawyer who tried to fight the compulsory acquisition of the Kerrigan family home. Denuto fell into the trap of denial: the eviction went against “the vibe”, he argued.
Many companies also fall into traps of denial when it comes to their pricing. Here are 10 of the most common misconceptions.
Pricing as part of the go-to-market strategy
Pricing should be part of the product development strategy, not the go-to-marketing strategy. Better still, companies should build a product to a specific price point that customers are prepared to pay. That way, companies can be confident they are providing value.
Pricing will fix a problem with the profit and loss
Top-down pricing is very common: “There’s a $2 million revenue shortfall on the profit and loss statement. Let’s jack up prices.” This is a company-focused approach to pricing, not a customer-centric approach, and it is fraught with danger.
Just use the same average across all products
Many companies adopt an across-the-board approach to price changes – both increases and decreases. This ignores differences in demand, value and customer segments. As a result, this approach often leaves money on the table.
Customers will pay more because our costs have increased
Cost-plus pricing is a sub-optimal approach to pricing. Not only does it ignore demand, but customers don’t pay you because of your costs; they pay you because of the value you provide them.
We only have one or two competitors…
Many companies assume their competitors are company A and company B. The reality is often different: customers’ consideration set may be far wider than just two competitors.
…So we’ll just charge what they’re charging
Companies that take a narrow perspective of the competition tend to price to the general level of the competition. This is often at the detriment of specific customer segments, which may be prepared to pay more for a product or service.
Just go with your instinct
Companies often move prices based on gut feel, intuition or sales force feedback, all of which are qualitative. While there is a role for qualitative feedback and research, it’s probably not as important as hard numbers and quantitative analysis, research and feedback.
We always do a 5% increase on July 1
So many companies always do a certain price change (5%, CPI) at one particular time of the year (often at the start of a new financial year). Unless you are in a regulated market (like health insurance), you should be looking to review and change your prices any time your market conditions change, or your value changes, just to name just a few examples.
I love the look of scenario six!
Scenario modeling is great: it tells us what outcomes are attractive. Unfortunately, it doesn't necessarily tell us which of the assumptions are valid.
That's unfair on customers
Believe it or not, I occasionally hear this. You run a business and customers are free to choose whether to buy your product or not. However, if you link your price increases to changes in value, and communicate and execute price changes accordingly, customer will continue buying from you.
Following these 10 simple steps will ensure you’re pricing more like The Castle’s retired QC Lawrence Hammil (played by Charles 'Bud' Tingwell) than Dennis Denuto.