September 20, 2012
6 Myths About Pricing You Need to Debunk for Your Pricing Strategy

The Easter bunny, the infamous Cash Cat, and the claim that “clean coal” protects the environment are myths. While everyone above the age of 15 knows that all of the above are not true (at least I really hope so for the last one), some myths are much more trusted. These incorrect rumors and opinions mainly extend from our lack of understanding about certain subjects. Yet, when we lack understanding we tend to end up losing time, money, and sanity.

Pricing is a prime example. As we explained in a previous pricing strategy blog post, pricing tends to be looked at as this ominous figure in business that’s so difficult to overcome that most are left paralyzed. It’s a process though. Even so, there are more than a few prevalent myths about this subset of marketing. As one of the least studied branches, pricing has become a black box for many business owners, who simply adopt existing prejudices and misinformation.

Let me put it simply: if pricing is a black box, you’re losing money. A lot of it.

Therefore, let’s dispel some of the most common myths to catalyze you into action so you can start capturing all of that lost cash you’re leaving on the table. After all, cash cat captures all the cash on the table. 

Value Based Pricing

photo credit: Nebojsa Mladjenovic

Myth #1: We need to accept market or competitor pricing

Basic microeconomics teaches that in perfect competition, individual companies cannot affect market prices; at least that’s what I remember those “economic principles in 60 seconds” videos on Youtube said ($100k on a top-tier education and YoutTube had all the answers for free). In other words, businesses must accept the equilibrium price, where the demand curve crosses the supply curve. While this is a convenient excuse for marketing managers to abdicate responsibility for pricing by finding an equilibrium point in the industry, this theory doesn’t correctly reflect how the real market works. Prices in any market span across a range, rather than fixing on only one point. Product differentiation through brand, quality, etc can all affect where your business lies on this range.

TRUTH: No matter the density of your industry, product and brand differentiation can take you well above the market standard. Hell, even basic things like psychological pricing can set you a part and justify price increases.

equilibriumprice resized 600

Myth #2: The only way to increase volume of sales is by decreasing price

It may sound too good to be true, but it is indeed possible to raise prices and increase volume at the same time. Price isn’t the only factor that attracts consumers.  Focusing on giving consumers a reason to pay a higher price for your product or service is crucial, whether that be greater quality or friendlier service. A powerful tool is market segmentation. Most products have a target audience, whether it’s the wealthy, the bargain hunters, the amateur software user or the rock star computer programmer. Creating different classes for your product depending on quality or number of services can expand the number of consumers you cater to, thus increasing buyers. Additionally, sometimes lowering your price can actually deter people from buying your product. Think about it. If I came up to you and said I’d sell you an Apple MacBook Air for $100, you wouldn’t buy it, because you’d definitely question the quality.

TRUTH: Volume is created by customer segmentation, charging different sets of customers different prices, and thus increasing volume and revenue.

Myth #3: We need to charge lower than everyone else

This is quite possibly the biggest misconception. A race to the bottom is one of the worst ways to compete, because you end up underpricing and losing out on your customer segment who begin to question your quality or revenue while your customer segment continues to buy. Lower prices equals lower revenue rates, which means the number of sales must increase to cover the loss. Obvious, yes, but it needed to be stated. Additionally, a smaller price tag doesn’t mean automatically consumers will flock towards your product. For example, if BMW suddenly sold its cars for $35,000 instead of whatever ridiculous number they’re priced at now, would that necessarily increase its revenues? Possibly in the short term, but in the long term they would begin to compete with cars made by Honda and Toyota who already have the market cornered. BMW would also lose out on the consumers that put luxury value in the premium pricing of their cars.

TRUTH: Underpricing, as we explained here and in a previous price optimization blog post, is rarely the solution to any pricing woes. You end up dropping into a different segment of customer and lose out on cash from your current customers.

Pricing Strategy

photo credit: jayRaz

Myth #4: Pricing isn’t important

Pricing is the most important aspect of your business. Period. We explained why in this pricing post, but to reiterate: a 1% improvement in pricing results in an average increast of 11.1% in operating profit. No other business lever has that impact, not cost optimization, volume increases, or anything. The answer is pricing. Of course, business owners are pretty busy people. Especially with small businesses that require constant diligence, which pushes pricing to the side, because an optimized strategy does take some time and effort. Yet, advertising, brand awareness, and the like all sum up to your price, so you should make sure you have the right one. Stop guessing, and start taking it seriously today.

TRUTH: Pricing is, bar none, the lever in your business that has the highest impact on the most important cell on your end of month spreadsheet - your revenue. You need to take it seriously.

Myth #5: Price optimization is difficult

I’ll admit, you can geek out for weeks about pricing. That’s what we do. Yet, basic pricing strategies and processes are not difficult to implement. In fact, calculating fairly accurate upper and lower bounds for your pricing is very possible to do from just looking at current sales, your loss rate, and speaking with a few customers (which you should be doing already). When you want to optimize even further, value based pricing brings a much higher confidence interval, taking research of consumer’s wilingess to pay and calculating price bands. Those math models may not be fun, but they get results and there are plenty of resources out there.

TRUTH: Optimizing your pricing isn’t difficult, it just takes some initiative. Check out our pricing strategy ebook to get the ball rolling. 

Pricing Strategy

photo credit: SalFalko

Myth #6: Price optimization will cost a fortune

As we explained previously, you don’t need to hire anyone or buy any software to get things moving on your pricing strategy. If you do, there are extremely large and expensive companies that will charge a kidney to do pricing. For small businesses, it is often difficult to conduct this type of research on their own, due to resource limitations. Not to worry, because there are pricing companies that specialize in aiding these smaller groups. They are usually characterized by less expensive services and quicker results. Remember though, you can get things moving by simply dedicating a small amount of time per week where you prioritize pricing research and optimization. Trust us, a little work can go a long way.

TRUTH: Pricing doesn’t have to be an expensive endeavor. There are a lot of cheaper alternatives to expensive consultants, and you can even get the ball moving by simply dedicating a small amount of time to pricing each week.

To read about more truths about pricing, download our pricing strategy ebook, sign up for a free price optimization assessment, or check out our new pricing page bootcamp course.


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