Several (actually many) years ago I was retained as a visiting lecturer at Manchester Business School working mainly on short courses for Senior Executive’s of local businesses.
On one occasion I was discoursing energetically on the need for a business to have a positive pricing policy when I was stopped short in my tracks by a pair of defensively folded arms and some strong disagreement.
“If we aren’t the lowest priced product in the market then we will go out of business” he proclaimed and no discussion or argument would shake him.
A not entirely unusual strategy in those days, it must be said.
Rather to my surprise, a couple of months later he asked me to take a look at his marketing plan. We started by questioning his pricing assertion by asking pretty well every comparable UK manufacturer (about 60 in all) to quote for a range of similar products and guess what? His prices were just about in the mid-point of the industry. So much for his argument about losing all the business. He didn’t KNOW the truth; he GUESSED it to prove his own opinion.
It transpired that the most visible company in the industry was the largest in terms of sales and profitability. That was another argument demolished.
Over the years I have used and promoted the “Good, Cheap, Fast” concept making the point that pricing should not be done from an emotional standpoint and people do not always buy the cheapest on the market.
If you want a product to be high quality (good) then it is very unlikely to be cheap and conversely if you want it to be cheap then it is equally unlikely to have a reputation for high quality.
All of this has led me to the understanding that product or service pricing policy is a marketing function and should most definitely not be a purely financial decision.
Just look at a very simple example. A business buys in a product at £10.00 each and sells them successfully at £15.00, a markup of 50%.
The Finance Director suggests at a Board meeting that if we offer a 10% discount then sales would expand so it is given a try. How often have we heard that opinion?
Instead of making a margin of §£5.00 per item, now we make £3.50 and believe it it or not we have to sell over 40% more product just to achieve the same result.
There is a very useful matrix available showing the effects of reducing and increasing prices, how many more items do we have to sell to make a price reduction viable, and even more interesting, by how much can we increase prices without having a material effect on sales levels.
(If you would like a copy of the matrix just email me firstname.lastname@example.org and it will be done)
Many times over have I experienced very doubtful Executives increasing prices and then waiting for the world to end, and are astonished when it doesn’t.
Businesses I have known who have had a reputation for low prices and illogically, top class product quality and service, have decided to increase prices on a regular basis and have not lost any significant business as a consequence.
Go back to the mantra - if you want it good and fast then it won’t be cheap and no more it should be. I have Vistage members running expanding, successful businesses and are proud that they are succeeding at some of the highest prices in the industry.
Reducing prices in order to increase demand is, in general, an illogical and usually emotional response to market conditions and is a fast road to disaster if you are not very careful.
Give the bullet a good bite and pilot a test price increase. You will be surprised at how easy it can be.
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