5 Pricing Expert Decision Failures
Retail is extremely sensitive to radical changes in the market. Consumer awareness of client acquisition strategies is increasing; however, retailers are still trying to improve old methods when it’s time to capture new opportunities. Retailers regularly underestimate the value of pricing strategy and prefer to concentrate on profit maximization and cost reduction. If this problem has not been considered, there is bad news: in making poorly thought-out decisions in pricing strategy the retailer puts at risk brand perception and potential gain.
We would like to focus on 5 decisions where pricing experts may fail.
Failed decision #1: Pricing based on expenditure instead of clients’ price perception
Negative price perception determines the serious displeasure of clients and as a consequence, it affects sales in a bad way. In the same manner, positive price perception causes a high level of retailer credibility, high percentage of return clients, and consumer repurchase loyalty. Price perception of products and retail branding is an important aspect and profitable area of competition. Sometimes customers are ready to pay the higher price for products of a well-known brand. Small retail chains cannot afford that, however, they can earn more by virtue of greater awareness of their own goods and by providing additional service. In this way the customer’s price perception becomes based on the pricing policy of the retailer.
If a retailer prices products not taking into account the clients’ price perception, one of two scenarios will occur:
- In cases where pricing is higher than the clients’ price perception, the time of ROI will increase, price image will decrease.
- In cases where pricing is lower than clients’ price perception, sales will be excellent, but the firm will be stuck in a red-ink operation, failing to profit.
Perception of brand by clients can collapse given this occurrance: the longer a retailer sells the goods for too low a cost strategy, the more difficult it will be to return the retail margin. Sometimes firms can make a decision to lowball for a certain time due to strategic reasons. Typically lowballing applies to the most popular goods - so-called “customer keepers”. However, only two factors define either a successful or unsuccessful business: sales growth and company profit.
Failed decision #2: To keep prices stable for a long time
Numerous retailers mistakenly keep prices at one level, referring to clients’ displeasure due to changing prices. Strategicly thinking companies use modern algorithms of pricing and accustom their clients to dynamic pricing. It is not necessary to guard clients needlessly – they are able to understand benefits easily. Dynamic pricing creates a fascinating game for the client, involving him in searching for the most profitable proposition. The client understands the price can change at any moment, so he is inspired to buy quickly and resolutely.
There is a good possibility for a company to improve communication, for example: announcing about changes in prices. The requirement of fast reaction refers namely to pricing in view of market mobility. Therefore, it is important to account for the offering value of goods or service changes; depending on the market.
Failed decision #3: To practice discounting aiming for customer acquisition
Discounts are a favourite marketing ploy. However, these tricks can be as repulsive as they are attractive. The problem with systematic discounting appears as often with clients who are ready to pay more as with clients to whom low prices are essential. Quality clients understand, a discount is the easiest way to find favour in customers’ eyes instead of upgrading service and evidencing advertency to clients’ needs. Other clients get in the groove of knock-down pricing, and as a consequence the company will have to grapple assiduously with such price expectations. But it is important to keep in mind that the audience of “discount catchers” is less responsive to other marketing ploys and seldom makes impulse purchases. Leaders in the market wish to do away with such an audience, alternatively accustoming the clients to repeat purchase, using the discount to reward long-term clients.
Failed decision #4: To change pricing manually and without monitoring the competition
In a highly competitive market changing of prices unquestionably affects the reaction of other players. Successful companies know everything about their competition and make every decision considering the prognosis of competitors’ reaction. In this way these companies are ready for reactions and are able to avoid long-term pernicious pricing wars. However, the practice of pricing discussion at spontaneous meetings is widespread in many companies. As a consequence the company has poor estimation of goods or services, and irregular price change and revision of price management. Participants of such meetings mostly have a lack of competence in pricing, this is why they base their presumptions on inconsequential cases or, what’s worse, on played-out prices of competitors. It should be mentioned that data for effective pricing is the result of research and must be included in the pricing strategy for your sales.
Failed decision #5: To reject optimization of the pricing process
Pricing strategy is the most neglected factor which influences the profitability of a company. In the final calculation of profit three variables make a difference: expenditure, sales results and pricing. The majority of companies are oriented on the first two factors: they search for ways to minimize expenditure and hope for improved sales results. The question of effective pricing is neglected owing to the lack of both awareness and experts among employees. Such disposition results in loss of potential gain due to poor awareness of injury from application of primitive pricing procedures. Here is a list of methods and measures to control pricing: commodity positioning on the condition of its availability and qualities, conjoint analysis, price perception index, and data analysis of competitors’ prices.
All above listed methods are quite time and labor intensive. Turning attention to new products in the sphere of pricing enables the retailer to optimize the entire process of pricing, choosing the most appropriate method. That is why a retailer is excited to receive up-to-date data about prices on web-sites of competitors and use this data to define correct prices for their own products; make daily price changes; ease the planning of sales promotions; and enhance competitive ability of the shop in general. In such manner a new base for modern and effective pricing can be created.
Remember, price is the first factor clients are conscious of. This is precisely why expert pricing is a reliable instrument of every company that is oriented to profit maximization and on fulfillment of business potential in a highly competitive market.