How does your company go about pricing a product or service? For example, do you simply define your costs and add a markup, or do you first assess what the current pricing is in the market, the potential for sales and then determine whether or not you have a competitive offering based on your existing cost structure?
Answering these two aforementioned questions points to the importance of knowing what the market will bear and not simply pricing a product or service based on what you think your customers should pay.
Far too many companies focus primarily on their costs of goods sold (COGS) and or their cost of sales. While costs are obviously important, it’s far more important to understand those costs relative to the market’s current pricing. Start first with what’s happening in your market and decide whether your current costs make sense to pursue a new offering.
Instead of understanding what customers are buying and why, a number of companies simply start with an uncompetitive cost structure, add their markup, and then make a futile attempt to close sales. Better yet, they often blame sales and business development for a lack of market penetration when the conditions for sales were at best extremely difficult, and at worst impossible.
So, why do so many companies make this mistake time and again?
Not Having a Solid Value Proposition: If you are going to charge above market pricing for something, then you better have an ironclad, well-defined and universally accepted value proposition. Your customers must come to appreciate your value and associate it immediately with your product offering.
If you have something that lasts longer and has better cost-per-use benefits, or if you offer a value-added product and service nobody else has, then you might be able to justify your higher price. If, however, none of these things are present, then it’s more likely that you won’t hit your sales targets.
Putting Together Your Value Proposition
Ignoring Marketing: If you are one of those companies that doesn’t see marketing as a necessity, or that it’s nothing more than a compliment to sales, as opposed to a sales-driven, revenue-increasing business function, then step aside so your competitors can dominate your market.
Simply put, if you don’t think marketing is important, then not only don’t you understand its purpose, but it’s more than likely you’re on the outside looking in. It’s also more likely that you’re trying to generate sales with an uncompetitive product offering, while your competitors eat your lunch and steal your customers.
Relying Upon Outdated Market Data: Your market is constantly changing. It’s never static, never stationary and always evolving. Relying upon outdated and antiquated market data is a recipe for disaster. It’s the reason why your competitors are always one-step ahead and why you’re always late to market.
Ultimately, it’s the companies with a market intelligence gathering strategy that are able to win the day. Putting together a market intelligence gathering strategy that feeds your team with pricing, competitive data and emerging market trends is nowhere near as difficult as it seems.
Not Having a Pricing Strategy: Are you trying to compete with low margins on high volumes or high margins on low volumes? Having a pricing strategy isn’t just about accounting for your current costs and hoping for the best. It’s about understanding your current production throughput, your costs to produce the product and or provide the service, and the ways you can reduce future costs in order to remain competitive. However, if you start off on the wrong foot with the wrong pricing strategy, then you’ll forever be behind your competitors.
Don’t assume that because you can make something that you should sell something. The best enterprises do their research. They rely upon their brand champions and strongest partners for information about pricing, volumes and market preferences. They research their industry first and then decide if they have what it takes to compete.
If they don’t, and they really want to move forward with a new product or service, then they put a plan in place to become more competitive and reduce costs over time.
If you want to learn about the importance of timely market data, then please go to: Importance of Market Data in Price Negotiations
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