If you’re a regular reader you know that pricing is by far the most powerful of the marketing mix variables. For a company that yields profits of 10% of their revenue, a 1% increase in pricing can potentially increase their profits by 10%. That’s powerful. So then why is pricing so poorly understood and vastly underutilized?
Because pricing is risky. There are three big risks when changing prices.
1. Price increases result in reduced revenue. If you increase prices, your customers may not purchase from you any more and instead they will purchase from your competitors. This is why you want to carefully increase prices where you are sure you can still win. You do this by determining which customers highly value your products and finding ways to increase prices to them. You do this by only increasing prices on new customers. You do this by determining which products have the most value over your competition and making sure you are charging for that value. There are no easy answers, but there are answers.
2. Price decreases are met by competitors which just lowers industry profits. If you attempt to lower price to gain market share from your competitors, it is very likely your competitors will respond by lowering their price to keep their own share. You have essentially lowered the profit for the entire industry. To avoid this you carefully lower prices for a few select reasons like meeting competition or to make room for a next generation product. Using price to chase market share is almost always a bad decision.
3. Price decreases have an instantaneous and almost irreversible effect. The great thing about price decreases is they can change customers minds today. Other marketing mix variables take months to move customers. But remember, customers hate price increases. Once you lower a price, you may get that quick bounce in revenue, but your customers will expect that lower price forever. This means even testing the effects of lower prices may be irreversible.
The reason pricing is underutilized is it is risky. Remember how a 1% improvement in price can increase profits by 10%? Well, the same 1% can decrease profits by that much or more. Is it worth the risk?
Mark Stiving, Ph.D. – Pricing Expert, Speaker, Author
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