Atenga, Inc., a pricing strategist firm providing services to commercial and industrial companies worldwide, has released a list of what it believes to be the 10 most common mistakes companies make when pricing their products. They are as follows:
1. Basing prices on costs, not customers' perceptions of value. Pricing based on costs invariably leads to prices that are too high or too low.
2. Basing prices on "the marketplace." Management teams must find ways to differentiate their products or services to create additional value for specific market segments.
3. Attempting to achieve the same profit margin across different product lines. For any single product, profit is optimized when the price reflects the customer's willingness to pay.
4. Failing to segment customers. The value proposition for any product or service varies in different market segments, and price strategy should reflect that difference.
5. Holding prices at the same level for too long, ignoring changes in costs, competitive environment and customers' preferences. Most companies fear the uproar of a price change and put it off too long; savvy companies acclimate their customers and their sales forces to frequent price changes.
6. Incentivizing salespeople on revenue generated, rather than on profits. Volume-based sales incentives create a drain on profits when salespeople are compensated to push volume at the lowest possible price.
7. Changing prices without forecasting competitors' reactions. Smart companies know enough about their competitors to predict their reactions, and prepare for them.
8. Using insufficient resources to manage pricing practices. Cost, sales volume and price are the three basic variables that drive profit. (Continued)