Sales pricing can be a tricky business. It is something every business owner has struggled with, at least from time to time. Here are three myths that can really get in the way, when it comes to making good sales price decisions in your company.
Myth #1 – People will believe I have the same quality as the higher priced solutions.
The price you set, unconsciously signals to customers a perceived level of value. It affects your brand, image, position and the types of customers you attract within the market place. Higher priced products and services, often give customers the perception of quality or uniqueness. The saying, “you get what you pay for”, is indicative of this.
While you may argue that your product is every bit as good and it could be, chances are you will still be seen as a solution only to those customers seeking a low-priced option. The person seeking high quality will disregard you product because you are charging less that what they expect for premium quality. Your actual customers, while attracted to the low price, will also believe the quality to be less than the more expensive, but are willing to sacrifice the quality for the lower cost. In other words, your lower price will be the trade off, no matter the side.
If your quality is equal to that of someone charging a higher price, then chances are you are putting in similar costs. By not setting your sales pricing at a comparable price, you are robbing yourself of margin and impeding your company’s ability to invest in growth.
Myth #2 – I will get more sales, thereby making more money, if I charge a lower price.
This one only makes sense if you are able to significantly, and I mean significantly increase your sales.
Let’s do some math.
Let’s say you have a $10 product and it costs you $8 to make. In a month you sell 1000 units. At the end of the month you would have $10,000 in revenue, $8,000 in cost and $2,000 in profit.
Let’s say you drop the price to $9.50 or a 5% drop. How many units would you have to sell to make the same amount?
The answer is 1,333 or 33% more. Here is the math. If you are now only making $1.50 profit per unit and you still want to make $2,000 in the month you divide the 2000 by $1.50 and you get 1,333. If you dropped your prices by $1,00 or 10% you would have to double your unit sales to make the same amount.
There is no doubt, dropping your price may bring in more customers, but along with price needs to be the plan to attract them (which likely will also need an investment), so be sure to do your math ahead of time. Your sales pricing can not be considered in isolation.
Myth #3 – My competitor is just undercutting the market, they aren’t making any money
This one could be the truth, however not one you should fall back on.
One of the easiest methods business owners use to set price is to simply compare what they do or provide to someone or something similar, and then charge what they charge. While easy, it doesn’t force you to look at your cost, business structure or how efficient you are in doing what you are doing.
As we discussed under Myth #2, simply dropping your price will not make you more money and in fact the opposite could exist if there is no plan to increase sales. If a strong a reputable competitor is charging less, then it is time to look at your costs and your efficiency, to understand what you are missing. It could be costing your more, than your competitor to do the same work. It maybe time to apply some technology or to upgrade equipment to compete.
This is especially important if you are required to bid or quote work. Gaining an understanding of how to effectively apply overheads to things like equipment, labour and materials can have a huge impact on your win/loss ratios.
Sales pricing can be challenging, but the results can more than make up in the investment in getting it right. As you can see, it is more than just your bottom line; it says a whole lot about you and the business you run!
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