Your Pricing Strategy (or lack therof) Could be Costing You Money

One of the biggest challenges of many business owners I work with is knowing how to properly price their products.   Too many owners believe that the indicator of a good pricing strategy is revenue; however, additional indicators are profit and cash flow.

I have done a LOT of work on both complex and simple pricing strategies.  The more you understand pricing, the better you will be able to actually MAKE MONEY from the products/services you offer.

To help you, here are some quick terms that you should understand; that many businesses owners do not:

  •  Reference Price – This is the price that your customer THINKS your product is worth.  If you are not careful, YOU could set this price incorrectly. For example, if you are advertising consistently with $10 off, 10% off, or some coupon; you could be setting up in your prospect’s mind that your product is only something they should purchase when there is a “deal.”

Or, if you do not know how to differentiate your product from your competitors; you may be stuck with the price THEY set.   For a long time, for example, a 2-Liter of Coke or Pepsi was 99 cents, because of the reference price these players set.

Caution:  once your Reference Price is too low, it takes a lot of education and marketing to convince your market that your product is worth more than that price.

  •  Cannibalization – For those of you that sell more than one item, your pricing for one item could “cannibalize” the sales of another.  If you charge too much for an entree, you may cut out sales of desserts.  If your cost for the shirts are too low, people may buy more shirts to get a “deal”; but buy fewer full-price and higher-margin pants (so you get sales, but your cash flow is low).  This is especially a danger for companies that run coupons and “specials,” as you may create cannibalization impacts that could hurt sales AND cash flow.
  • Stick – One of the easiest ways to get a quick sales boost is to raise your prices. However, because people make choices; not all of your price rise will flow through to the bottom line, as some people will decide not to buy.

 What you must understand with “Stick” is that: some people will immediately decide not to buy based on the price change; others will buy now, but do not come back; and still others will buy, but buy less or move to a cheaper item.  In these cases, your long-term “Stick” could be low, or negative.   Watch out for this especially when doing across the board price increases.  In the end, what is important is how much of your price change “sticks” over the long term.

The fact is:  price your products poorly, and you will find a huge disconnect between your marketing, your sales, your cash flow, and your long-term business success!

Next Post, I will give you a few more tips to help you improve your pricing strategy.  So, please pass this BLOG on, and encourage people to subscribe and learn this valuable information.

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