The 4 Biggest Mistake in Product Pricing
How to spot them and how to avoid them.
What this article covers:
- An overview of the four biggest mistakes you can make in pricing
- A framework that will help you think about pricing more strategically
Pricing can often feel like something of a dark art. There are many indicators to look at, yet no best way to go about it. Further, it seems that often those who defy conventional wisdom win — while, of course, many who do defy conventional wisdom actually end up shutting shop.
At the same time, figuring out your pricing is incredibly important to your whole organization. It determines the operations you can build, the margins you can realize, your product’s perception, and much more. Pricing is incredibly important, yet very hard to nail down properly.
How can we think about it in a better way?
The Four Biggest Pricing Mistakes
In value creation and value capture, there are some cardinal sins that you will need to avoid at all costs. These will ensure that your pricing strategy will drive you down the wrong path and eventually result in disaster.
1 — Pricing Too High / Too Low
The obvious one is pricing entirely out of the relevant range. Now that sounds easy but is a bit more nuanced than it sounds. The obvious:
- Pricing Too High: Exceeding the willingness-to-pay of big parts of your target market and being unable to generate revenues large enough to sustain operations and grow profitably.
- Pricing Too Low: Underpricing the value you deliver so significantly, your unit margins are negative, and you lose money by selling and scaling.
The not so obvious parts are the input variables into the context, as of course, “too high” and “too low” depend on many other factors.
- Target Market: Depending on your target market, the same product can be way too expensive, just right, or priced too low. It matters whom you are trying to sell to in that target markets differ in size, value perception, and difficulty to address.
- Operations Strategy: Depending on your value creation mechanisms, the same price point might be too low or workable. Unit economics depend on inputs and outputs; hence your operations strategy matters.
2 — Pricing The Wrong Value
Pricing for value perception is critical. Companies often think they are in one kind of business, while what the customers buy is different.
“People don’t want to buy a quarter-inch drill; they want a quarter-inch hole.” — Theodore Levitt
Pricing the right portion of the value creation is essential — both to ensure that value creation, value perception, and value capture align and ensure that the pricing range is aligned to the right comparables.
The Hilti as an example — they understood that professional construction companies do not just need a set of tools, but they especially need the availability (read: uptime) of those tools. A different value perception that can be priced differently — leading to the creation of Hilti Too Fleet Management.
Similarly, Google, Facebook, and others have understood that pricing access to their services would limit consumer demand. In contrast, pricing for consumer attention creates a large market that advertisers love to tap into to reach potential customers.
3 — Pricing Different From Your Positioning
Pricing is one of the most substantial contributors to the perception of a brand and its products. Pricing towards the bottom of an established category (such as sporting apparel) signals entry-level gear, appeals to irregular hobbyists, and is perceived as cheap and unlikely to last long. However, pricing towards the top of the range is associated with professional equipment, durability, and superior performance.
The pricing range you choose will send a value and quality signal to customers — and therefore has to be considered carefully. Are you building a premium offering, with emphasis on innovation, performance, and quality, or are you creating an offering range that should be easy-to-buy, without much consideration, yet would be perceived as cheap?
All positionings are possible to achieve, yet clear thought and reflection should be given to the decision.
4 — Cost-Plus-Only Pricing
Only deriving your pricing model from your cost base and adding a mark-up is a highly suboptimal way to think about pricing. Yes, it will help you ensure positive unit economics, yet that is not the only factor you need to look out for. Besides that fact that your unit economics will likely change over time, as you add operations, overhead, and scale, there are many more aspects to pricing that a steady margin.
As mentioned above, pricing will play a significant role in branding. Yet beyond that, it is also about value creation alignment. Customers do not directly derive value from your processes, which add to your cost base, but from using your products and services. Using cost-plus indicators to understand your bottom pricing line is essential, yet to go beyond the consideration of value creation is much more critical.
Taking Some Guesswork Out Of Pricing
One of the best pricing frameworks I have come across is Van Westendorp’s Price Sensitivity Meter (PSM). When thinking about pricing and conducting qualitative or quantitive research to arrive at a good pricing point, it asks four simple questions:
- At what price would you consider the product to be so expensive that you would not consider buying it? (Too expensive)
- At what price would you consider the product to be priced so low that you would feel the quality couldn’t be very good? (Too cheap)
- At what price would you consider the product starting to get expensive, so that it is not out of the question, but you would have to give some thought to buying it? (Expensive/High Side)
- At what price would you consider the product to be a bargain — a great buy for the money? (Cheap/Good Value)
Image Credits — Wikipedia
The prerequisite to this work is that you have your customer value proposition clearly mapped out so that a potential customer has a clear understanding of what your product/service will be able to do for them. Once you have that in place, you can use the PSM to understand the acceptable pricing ranges and positioning options within that.
When combined with your operational cost base as a comparable floor and your positioning as a guide, and your unit economics scalability as a sense check, this can lead you to a great pricing strategy fit for purpose.
Co-Founder & Director
Sebastian is Co-Founder and Chief Operating Officer of MING Labs, a global strategic design and digital transformation consultancy with 6 offices in 4 countries. He started and grew MING Labs in Shanghai, China for 5 years, before moving to Singapore and establishing an office here. With now globally 80+ experts, Sebastian, and MING Labs work with MNCs, local champions, SMEs, and government agencies in setting their transformation vision and strategy, as well as helping them execute against that with organizational enablement and implementation of key strategic initiatives across Business Design, Experience Design and Technology Implementation.