Pricing 2: Pricing Fallacies

Common Pricing Fallacies That Doom Businesses to Low Profitability

The following are the most common pricing fallacies I encounter across all business sectors from biotech to product and service businesses directed at local consumers.

The Theory of Supply and Demand

The theory of supply and demand is just that, a theoretical correlation of supply, demand and price.  It requires that what is being supplied is the same (a commodity) from all suppliers.  In my career I have never encountered a business, product or service that was not differentiable in some way from other products in the same market*. As such, this takes them outside of the theory of supply and demand.  When pricing in your business, unless you sell a true commodity on the commodities market, forget everything you ever learned about supply and demand, it does not apply to your business. (I am not saying that the theory is not valid, just that it does not apply to almost all businesses)

In competitive markets you need to be “competitively” priced!

Yes, in a competitive market you need to be “competitively priced” relative to the value you deliver to the customer. Unfortunately, what I encounter is that in the minds of clients, “competitive price” often means the same or lower price than competitors.  If you are selling an inferior or lower value product than your competitors, yes, your price should be lower than your competitors.  However, if you are selling a better product, you should not be priced the same as your competitors, if not just out of fairness to yourself.

Customers buy on price!

Yes, customers do buy on price, but only if you force them to do so!If you sell on price, the customer will buy on price.  If you sell value effectively* the price becomes secondary and you can sell at higher prices than your competitors.  I been involved in making this switch from price to value in businesses I have owned, worked for, and consulted to, many in highly competitive markets (B2B, B2C and B2G), where the former owner, management or client has thought that they had to compete on price.  Upon working the process to change to a value mentality, institute and train around a value selling process*, and raising prices, sales volume, margin and profitability grew rapidly!  Yes, in most cases people said this was crazy and would destroy the business, until they saw the results.

Reducing price is sometimes required to maintain customers

This is true if you are not differentiating your product or service well* in the market relative to your competitors or your product is inferior or lower value. Reducing price and price wars are generally a losers game as there is always some idiot, or a large company who can wait out your failure, who is willing to lower prices further than you can.  Reassess your value proposition, clearly differentiate your product or service and raise your price to send a strong message about your value instead*.  Yes, it sounds crazy, but it works when done correctly and well, regardless of the product or service or who the customer is that your are selling to, B2B, B2C, or B2G)

Avoiding these fallacies can have tremendous impact on the growth of both sales volume and profitability!

* To be addressed in coming blog posts

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