Profit margins and pricing are often misunderstood. Many entrepreneurs assume that price increases put them at an automatic competitive disadvantage. But pricing consultant Rafi Mohammed argues that small, strategically targeted price increases can actually give a company a competitive edge. The key is to bridge the profit disconnect. Business owners often view pricing as a mix of markups, margins and matching the competition – plus a modicum of “gut feeling.”
But such an approach has no relevance for the most important component of all: What customers are actually willing to pay. As a result, most businesses leave profits on the table daily, argues Mohammed. Better pricing can be the quickest path to bigger profits. “In many cases, prices can be changed on Sunday night and new profits will start rolling in on Monday morning,” says Mohammed. Here are seven tips for proper pricing:
- Avoid the markup mistake: The most common pricing pitfall is setting your price based merely on a set markup. Such cost-plus plans often forego potential profits because they never account for what customers are willing to pay.
- Price for value: Take a lesson from street vendors who understand better than anyone the principle of value-based pricing. Umbrella prices go up the moment it starts raining. It has nothing to do with the cost of the goods, and everything to do with the value the customer places on the product.
- Avoid one-size-fits-all: Pricing is more personal than you might think. Customers have different needs, preferences and expectations. Some prefer package pricing, while some like a la carte. Use pricing tactics that serve those different needs.
- Let customers choose how much to pay: Most businesses can boost profits by offering “good, better and best” type choices for a wide range of products and services. Think about creating different versions of what you offer at different price points.
- Create a different offering for your most price-sensitive customers: For any given product or service, some customers are willing to pay more than others. Offer a spectrum of prices based on customer actions. For example, those who line up to be “first to own” (think Apple iPad) are willing to pay a premium price. Those who drive an hour to shop at outlet malls aren’t. Each new pricing tactic you create has the potential to add another customer segment to your mix.
- Focus on profit, not margin: Many businesses equate “high margin” with pricing success. Maybe so, but a high margin can also point to opportunities to serve more customers by using discount tactics as well. Profit is your goal, not margin.
- Don’t discount across-the-board: Discounting can be damaging if handled badly. Mohammed recommends this: “Hold steady on prices to maintain current purchases, and then implement pricing tactics — such as discounts, lower versions or financing – to keep and attract new price-sensitive customers.”
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About the Author: Daniel Kehrer, Founder and Chief Content Officer of BizBest Media, is a senior-level leader in digital media, content development and online marketing with special expertise in startups, SMB, social media and generating traffic, engagement and leads. He holds an MBA from UCLA/Anderson and is a passionate entrepreneur (started 4 businesses), syndicated columnist, blogger, thought leader and author of 7 business and financial books.