For many companies, pricing strategy essentially amounts to guesswork — shooting in the dark and hoping they land on prices that customers are willing and happy to pay — but that kind of "throw it at the wall, and see what sticks" mentality tends to lead to big time pricing mistakes.
Pinning down an optimal price for a product or service is admittedly easier said than done. You need a solid grasp of your offering's value, a clear picture of who's buying it, and an understanding of their interests and circumstances.
While the process can be tough to make sense of, there are some definite "no-no's" businesses need to avoid — common mistakes companies often run into when pricing their products. Here, we'll take a look at some of those price-related pitfalls and get some context on how to identify when you've made a mistake with your pricing strategy.
Common Pricing Mistakes to Avoid
- Pricing Based Solely on Undercutting Your Competition
- Not Segmenting Customers
- Not Trying Enough Price Points
- Overcomplicating Pricing Presentation
- Selling Money Over Time
- Not Updating Pricing
- Not Budging on Profit Margins Across Multiple Products
- Not Considering Context
- Not Considering How Competitors Will React to Price Changes
- Making Pricing Decisions That Don't Align With Business Objectives
1. Pricing Based Solely on Undercutting Your Competition
Determining prices with a "look how much cheaper we are than the competition" mentality is rarely a good bet. How you price your product shapes how customers perceive its value and your company's legitimacy as a whole.
If your entire draw is rooted less in a strong value proposition and more in showing how much money prospects can save, you might come off as sleazy or substandard. Lower prices can often be conflated with lower quality, so if that's all your prospects are hearing about, your product or service might seem higher risk or unreliable.
Bear in mind, this doesn't mean you can't offer lower prices than your competitors — it just means you shouldn't radically undersell yourself and lead with the discounts you offer, relative to your competition. Prospects need to be sold on value, and value doesn't necessarily mean "bargains".
2. Not Segmenting Customers
If your business offers an array of products or services, your base probably doesn't fit some uniform, one-size-fits-all mold. Different kinds of prospects have varying interests and sensitivities when it comes to pricing — and it helps if your pricing strategy reflects that.
Companies often run into trouble when they don't create or consider detailed buyer personas — that tendency can lead to more arbitrary and less effective pricing strategies. That's why you need to segment your customers.
Identify who's buying from your company, the specific products or services they generally buy, how they're buying them, how they like to be sold to, and the budget constraints they're working with.
With that information in mind, you can start to refine your pricing strategy to more effectively appeal to multiple kinds of buyers. That offers a new dimension of sophistication to your pricing strategy — allowing you to make the most out of your sales efforts.
3. Not Trying Enough Price Points
One of the biggest mistakes that business owners can make is not offering enough price points — specifically, ones that are high enough for higher-end buyers.
Consider this study from William Poundstone's Priceless: The Myth of Fair Value (and How to Take Advantage of It). Researchers conducted tests by using different prices of beer, starting with just two prices and then shifting over to three.
First, they started with a "regular" beer, priced at $1.80, and a "premium" beer, priced at $2.50. From there, they measured the percentage of people who bought either beer. This was the result of their first test. In their initial test, roughly 20% of subjects chose the regular beer, while 80% chose the premium one.
The researchers then decided to see what would happen when they introduced a third price point into the equation. In this case, the third price was a "bargain" price — priced at $1.60. In this case, 80% chose the regular beer, while 20% chose the premium one.
Obviously, that trend is less than ideal. Adding the third price actually encouraged people to buy the middle price more often than not, decreasing overall revenue. But the study didn't end there.
The researchers then decided to take out that bargain beer and add a "super-premium" beer priced at $3.40. In this case, 85% of subjects chose the "premium" beer — while 5% selected the "regular" option, and 10% selected the "super-premium" one.
As you can see, the final test performed the best of all, with slightly more people purchasing the "regular" beer, but with the added advantage of people now buying the "super-premium" beer as well, adding to overall revenue.
The takeaway here is that you should be wary of anchoring your prices by introducing too many lower price points, but that you may be able to take advantage of the fact that many of your users will be perfectly fine paying for a higher price point as long as it offers a premium experience.
4. Overcomplicating Pricing Presentation
According to a research paper from the Journal of Consumer Psychology on behavioral economics, prices that contain more syllables when spoken seem drastically higher to customers. What does that mean exactly?
Compare the prices of:
They technically all mean the same thing. But according to the study, the subjects felt both the first and the second examples were much higher than the third. Why is that? Well, when the extra syllables and commas were added into the pricing, those prices felt higher.
The researchers indicate this phenomenon occurred even when the prices were not stated out loud, meaning that reading the price aloud in their head was enough to make it feel more expensive.
What does this mean for you? Ideally, you'll avoid any and all "unnecessary" additions to your pricing structure. It may seem silly, but the research has shown us that you should have a "$2500" product rather than a "$2,500.00" product — even though they represent the same cost.
5. Selling Money Over Time
Do you ever wonder why bargain beers like Miller Lite have slogans like "It's Miller Time!" as opposed to slogans playing up their low prices? Well, research from Stanford professor Jennifer Aaker provides a pretty compelling answer.
Her study found that customers generally referred to positive memories they had with certain products when asked about them — not the money they saved when buying them.
As Aaker notes, "Because a person’s experience with a product tends to foster feelings of personal connection with it, referring to time typically leads to more favorable attitudes — and more purchases."
In additional research published by the Wharton Business School, Aaker and her colleagues showed that when prices were already low for an item, the best way to invoke positive thoughts about that product was to remind customers of the time they enjoyed with it or the time they saved by investing in it.
Think of it this way: Does Miller Lite want you thinking about how cheap their beer is, or do they want you to recall a hot summer evening you enjoyed by drinking cold beers with good friends?
That's the mentality you have to carry in this situation. People care more about experiences than saving a few dollars here and there — bear that in mind when pricing products.
6. Not Updating Prices
Your market probably isn't stagnant. New trends, consumer tendencies, and competition can shift the landscape you're working against. If your space fits that bill, you might want to consider adjusting how much you charge every now and then.
Some businesses run into trouble by keeping their prices too rigid — even as their competition adapts to shifting market circumstances. It's worth noting that this particular point doesn't necessarily apply to all businesses.
Some industries and companies tend to keep their prices sticky — or resistant to change despite shifting demand and other changing economic conditions — but others are best off adjusting their price points here and there.
If you're finding a specific price point isn't delivering the results you need or your industry is quickly and aggressively trending away from what you're charging, consider updating your price to keep pace.
7. Not Budging on Profit Margins Across Multiple Products
One mistake companies that sell multiple products often make is insisting on a uniform profit margin for all of their offerings. For instance, let's assume your business sells two products — one that costs $3.00 to produce and another that costs $5.00.
It could be easy to get fixated on the idea of making a consistent profit margin with both products — selling them at $10.00 and $12.00, respectively. That margin might seem ideal on paper but probably wouldn't work too well in practice.
Different products have different markets, typically populated with different buyers. So naturally, those products should be priced to reflect that variability. Don't get too fixated on the idea of oversimplifying your pricing strategy to make a steady margin on all your products. Going that road can seriously stifle sales.
8. Not Considering Context
When is one Budweiser worth more than another? Logic says that since they're the same product, the answer should be never, but this research study in New York Times Magazine proves that this just isn't the case.
Researchers found that customers were more willing to pay higher prices for the same type of beer when it was sold from an upscale hotel than when it was sold from a run-down grocer. The lead researcher, Richard Thaler, was surprised that consumers had no objections to the higher prices when asked what they would pay.
So what's the moral of the story? Your prices can be raised by simply changing the context in which you're selling. Adding an element of prestige to your offering can shift consumers' opinion of it and, in turn, enhance its perceived value.
Are you selling products or full-feature solutions? Is your ebook for sale, or is your complete training toolkit available for customers and ready to solve all their problems?
These wording choices may seem trivial, but on the web, they're often your best way to express your product's value — and as we've seen from the research, part of your product's value is based on the context in which customers view it.
9. Not Considering How Competitors Will React to Price Changes
Shifts in your pricing strategy can have some major implications on your competitive landscape. And if your competitors know what they're doing, they're not going to gloss over your pricing adjustments and carry on like nothing is happening.
Any price changes you make — especially if you lower prices — can have a direct impact on your industry peers' bottom lines. So if you want your price shifts to be as effective as possible, you need to forecast how your competition is going to react.
Take a close look at the competitors who offer their products or services at the price point you're aiming to hit. Try to factor in how they'll adjust if you start siphoning off segments of their customer bases.
Determine whether your competitors have the need or financial resources to meet you at your new price point. Consider whether your pricing might drive an increase in buyer volume to your space, and anticipate how your competition might work around your new strategy.
One way or another, get a pulse on what your pricing changes will do to your broader marketplace — not just your internal projections. Your place within your space might have more immediate bearing on your success than any other factor, so you always need to be mindful of how your pricing changes might reshape it.
10. Making Pricing Decisions That Don't Align With Business Objectives
Sometimes, quick pricing changes are made borderline-arbitrarily — strung together without much research, thought, or legitimate strategy. And that kind of hasty decision-making often means that proper alignment with business objectives gets pushed aside.
Your pricing changes need to line up with your marketing and sales goals. You have to consider the hard, quantitative figures you're looking to hit — along with the implications your changes might have on your customer satisfaction and brand identity.
Don't make any pricing changes without a thorough understanding of what you want out of them and whether they're going to suit your overarching business objectives — and that process takes a lot of research, solid forecasting, communication between departments, and a firm picture of your company's needs.
How to Know When You've Made a Pricing Mistake
The prospect of identifying and remedying a pricing mistake is much easier said than done. It might seem straightforward to look at less-than-stellar sales and immediately know that your price is to blame. But a lot of elements are in play when pricing a product — and there are even more to consider when you account for selling and marketing it.
Revenue goals, brand positioning, broader demand, marketing objectives, and several other factors play a role in how you price your product. That means a pricing mistake can stem from several possible sources.
That said, there are some signs you can look for to help you see if you've made a pricing mistake. Perhaps the most obvious one has to do with lackluster sales — especially if you have a competitor outperforming you at a particular price point. If that's the case, you might have to reevaluate your market position and the pricing strategy that comes with it.
Another is seeing if sales take a dive at a certain price over time. If you've succeeded selling at a given price point, historically, only to see sales fall off a cliff on a dime, it probably means the market for your product or service is changing — and your pricing strategy might need to change with it.
Ultimately, products and services are worth what people are willing to pay for them. If people aren't willing to pay a certain price for yours, it probably isn't worth what you're charging — at least not at that moment.
You need to sell based on your offering's value — and that comes from your positioning and your customers' perception. Identifying pricing mistakes rests on you understanding that value and adjusting your strategy to convey it effectively.
As I said, pricing a product or service is rarely straightforward, and there's a good chance that landing on a price point that works for you will take some trial and error. Still, there are some common pitfalls you can avoid when working through the process.
Editor's note: This post was originally published in November 28, 2013 and has been updated for comprehensiveness.