Strategy on Pricing
February 9th, 2007
The “Charge based on what the other guys are charging and the hope to squeeze out a profit” method of pricing is known as “Cost of Competition” and is used by plenty of companies. It’s intuitive and easy to work out, but it often leaves a lot of money on the table.
Sticking to the cost-and-competition paradigm is an “almost certain way to lose” says Thomas Nagle a partner at Cambridge consultant Monitor Group.
Price and competition are important but shouldn’t be your focus.
It may be counterintuitive, but the lowest price won’t always reel in the most customers. People will pay for what they value, and that translates into a willingness to pay a premium for higher quality, greater expertise or faster service. There is often a gap between what customers will pay and what a business charges. The first step toward closing it is to ask, how much do my customers value me, and what’s their next best option?
- Prices that end with 9 imply value.
- Prices that end with 0 imply quality.
- Private label products should be priced at least 15% below brand name equivalents.
- If customers are unfamiliar with a product, they will tend to use the price of the most expensive item in the category as their reference point.
- On average, discounting a product will cause sales to rise 125%.
- But discounting in terms of quantity, such as “two for $5″ will on average, boost sales by 165%.
Source: Business Week Small Biz Winter 2006
