Top three pricing mistakes: Using guesses or gut-feel to price

(Article 3 of 3)

  • Some say they use the “market price.” Well, unless what is sold has prices published on commodity exchanges, there really is no way to know “the market price.” Other companies that say they use the “market price” simply send out their salespeople to negotiate the best deal. This is rarely a good idea, as salespeople tend to sell at the lowest price they can get away with, which leaves lots of money on the table.
  • Other companies may say “we know what our customers are willing to pay.” This could be because the company or the person setting prices is so sure about his or her guess or gut feeling that they would never welcome a discussion on the topic. Because they “know.” Or, it could be because they have actually asked their customers. But there is a problem with this too. Who would believe the answer given by a customer, if a seller asks a customer what they are willing to pay for a product or service? The buyer for sure will lowball the number, for the simple reason they want a lower price, a better deal the next time they buy from the same company.
  • Yet other companies will say “we use our market knowledge and gut feeling” to set the price. This is at least an honest statement. And that is a good thing because those who realize they use an imprecise method to set prices will be open to considering other, better, methods to set their prices.
  • The first category includes those who were so wrong in their guesses that they did not sell, or did not sell enough, or did not generate any profits or enough profits. These companies failed. Literally, went out of business.
  • The second category includes companies that set prices that are “right enough” so they stay in business, but “wrong enough” so they will forever struggle in a competitive market. It may be that the price is too high and their sales volume is very low, or that the price is too low and they do not make enough margin, or if the price is way too low they will also suffer from insufficient sales volume — as a too low price becomes a message of poor quality and benefit.
  • The third category includes companies whose pricing guesses get them almost right. These companies may do well or at least as well as their competition. But they are still leaving money on the table, or they are not getting the sales volume they could. Or both.

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Per Sjofors

Per is an author, speaker, and authority on all things pricing and the Founder Los Angles based Sjöfors and Partners.