Dangerous Pricing Advice

Forbes magazine has some suggestions to help entrepreneurs and small businesses avoid Three Mistakes When Pricing Your Products. The article notes correctly that “Most small companies get pricing wrong.” The three mistakes to avoid:

  • Pricing for the Short-Term
  • Ignoring the Competition
  • Not Keeping Customers in the Loop

These are good points, but there’s not one mention of value. If you don’t know how your customers value your products, it’s going to be hard to price effectively. Price is the monetization of value. Ideally, you think about this value and feed it into the development of your offering before you make a product or print a brochure. Even if you’ve already got a product, you still need to think about value, then price. Different customer segments will value your offering differently, which may lead to different pricing policies (volume discounts, rebates, bundled offerings, holding the line on list prices, etc).

Unfortunately, the article only suggests that the problem for short-term pricing is pricing too high. Most companies price too low. Once a product gets established in the market with a certain price point, raising prices is very hard. Lowering them is pretty easy. If you need to break into new markets, consider samples, or other forms of promotion that encourage adoption of your product without eroding the value that customers perceive. Products launched with deep promotional discounts may appear successful until it comes time to actually charge “regular price.” You can’t price higher than the value your customers perceive, but you don’t have to price lower, either. Follow the prescription of the article at your own risk.

(Measuring value is takes effort, of course, which is why people tend to skip it. We use the Value Price Waterfall framework, but any reasonable effort is better than putting your finger in the wind.)

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