Why do good managers make bad pricing decisions?

How hard can it be to determine prices? Look at your costs and the price of your competitors. And then set the right price based on your experience and feeling.

Unfortunately, the results of such pricing decisions are sometimes disappointing. Sales fall short, your clients react differently than expected and your competitors seem to perform better. Do you recognize this unsatisfactory result? It might be that the following misunderstandings are hindering you.

1. Price is determined solely by the market  Economic science states that the price of a product is determined by supply and demand. This is correct, but bear in mind that companies themselves form the market and therefore can create customer value. Even producers of basic products such as mineral water, bananas and coffee are able to distinguish themselves from the competitor and ask for a higher price. For example in the coffee industry, Starbucks is able to charge a 2 to 3 times higher price for a cup of coffee than the competition. It is doing this by creating an image of luxury and good coffee in a cosy living room atmosphere. In the telecommunication industry it is striking that there are more expensive and cheaper mobile telephony and internet brands, while mobile phone calls and internet have become as ubiquitous as tap water and electricity from the socket.
2. Most customers are very sensitive to price changes The impact of price changes on customers is easily overestimated. This can lead to unnecessary price reductions or wrongly delayed price increases. In practice, the price is often not the most important reason for a purchase decision. In addition, several studies have reported that customers often cannot remember the exact price of products. And that is why the customer’s perception of the company is more important than the actual price level. Media Markt cleverly portraits itself in promotional campaigns as the cheapest, though in reality this is only the case for specific offers.
3. Price changes can easily be reversed Changing prices often have far-reaching consequences and which cannot undone by turning them back. Customers and competitors will not forgive a wrong price decision. If you set your price too low you could lose all your credibility and reputation. And if you set your price too high you could put yourself out of the market permanently. Thorough pricing does not lend itself to experimentation.
4. High market share automatically leads to higher profitability  The belief that a high market share naturally leads to high profitability has been challenged by case studies. Companies with a high market share, such as General Motors, United Airlines and Philips should be the most profitable businesses. That is not the case because these companies achieve moderate financial results. Without a price premium or low production costs you cannot achieve good results. Therefore focus on specific customer segments and not on the total market share.
5. New products can only be successfully launched with large discounts  Introductions of new products do not have to be accompanied by large discounts to make them successful. By giving large discounts much of the value created is given away. Better positioning of your product and segmenting to your customers can prevent this. Doing this makes it possible to recoup development costs more quickly. To illustrate, Apple is a prime example of this.

By the above misunderstandings, you could unnecessarily leave money on the table or put yourself out of the market.

What do you think is important for good pricing? I am interested to read your opinion and experience, so please share it in the comments section below.

Author: Marcel Van Harrewijen
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