Three Pricing Mistakes

Quick Insight

Three of the biggest pricing mistakes I see are:
  • Giving away or underpricing your product
  • Cannibalization
  • Listening to staff instead of customers when setting pricing
Read below to learn how to avoid them.

I set product pricing at different businesses for years and chaired the Pricing Committee of a $2 billion company. Here are three of the biggest mistakes I saw:

1.    Giving away or underpricing your product
People take cues from prices. Pricing should approximate the perceived value. Customers get suspicious when there’s a large gap between price and value. That suspicion tanks trust and sales.

Being the lowest price in the market can cause low profitability and weak franchise value. You’re attracting customers who have little loyalty. They’re easily poached away from you by whoever is offering the lowest price. Growth may seem like progress but it’s a total waste if it doesn’t lead to loyal customers.

2.    Cannibalization
A new product can “cannibalize” sales of existing products. The definition of sales cannibalization is when one product decreases sales of another product. Sales cannibalization is a problem when the existing product that's losing sales has a higher profit than the new product. This may occur when you offer the new product at a low price using a loss leader or penetration pricing strategy. Total company profits will suffer.

Price cannibalization is a massive hit to profits that owners often overlook. The definition of price cannibalization is the difference between a higher and lower price of a product multiplied by the number of units you would sell at the higher price.

For example, let’s say you usually sell your product at $100/unit but you lower the price to $90 to drive growth. If you normally sell 1,000 units, your profit dropped $10,000 ($100-$90=$10 X 1,000). Do you know how many more units you need to sell at the lower price to recoup this lost profit? When you model potential changes to your prices, don't forget the costs of sales cannibalization and price cannibalization. (btw - you always model the profit impact of potential price changes before actually changing the price, right?)

3.    The toughest sale
The toughest sale isn’t to your customers; it’s to your sales staff. When I set pricing at companies, these staff bore the brunt of the customers who weren’t happy with the price change. Sales staff were painfully aware of the deals they lost. Pricing low to keep those customers would mean higher sales but lower profits. Sometimes sales staff warned of big drops in sales that never materialized.

You may lose some sales when you raise your price. Customers that chase the lowest price offer little value to your company. Chasing those customers will cause you to lose profits from customers that truly value you and your product. Never sell yourself short to those who don’t value you. 

I wish you the discipline to avoid these mistakes. I wish you well.
- Rob Stephens

Further Insight

CFO Perspective Resources

  • Video: Pricing Strategies for More Profit and Customer Engagement - You’re fulfilling your customers’ dreams. Your customers are delighted with their experience with you. Now, as a business, can you charge for this? Customers are willing to give you their valuable dollars when you give them value. How do your customers know whether your prices are a good deal for the value they are receiving?
  • Course: Marginal Profitability Analysis - Marginal Profitability Analysis provides relevant decision information for setting prices, product design and product profitability. The course provides practical examples of making decisions with marginal profitability analysis.

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