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Pricing for profit

September 29, 2020
September 29, 2020 Conecta Software
  • Pricing requires planning and accurate data to enable us to make decisions.
  • It is important to determine the prices of the offers based on the value perceived by the customers.
  • At the first sign of resistance from customers, many sellers try to reduce prices for fear of confrontation or rejection.
  • Discounting, that is, throwing away money and profits, is a huge cost for most businesses.
  • People do not automatically buy the cheapest products or services.
  • Focus on real value and customers will pay your prices, even if they are higher.
  • A higher price may scare off some customers, but its impact on profitability will offset any losses.
  • In addition to price, when customers buy they focus on factors such as quality, reliability, reputation and brand appeal.
  • Raising prices is the easiest way to increase profits.
  • If you offer more value, i.e. warranties, better payment plans, free installation and so on, then increase your prices.


To increase profits increase prices

There are five options to increase your profits: 1) Find more customers; 2) Convince existing customers to buy more; 3) Reduce costs and be more efficient, or increase productivity, or both; 4) Increase the average value of your product, for example by offering packages, or 5) Increase the price of the goods or services you sell.

"Price is the most important factor affecting the profitability of a business, profit center or department.

The last option, to charge more, is the easiest route to higher profit, but many merchants refuse to accept this premise, as they are concerned that the increase will undermine the sale. Customer studies show that more people (68%) stop buying from a particular company because of perceived indifference rather than because of price issues (10%).

"Whatever your business, selling some products at very low prices in the hope of making a profit has very little chance of success.

Sellers often mistakenly blame prices when they cannot sell, although the reasons are more likely to be related to other factors. When they offer quotes or project cost estimates, for example, they rarely include attractive information about the reasons for choosing them or do not follow up to determine the reaction to the proposal of potential customers. A surprising number of salespeople are unable to tabulate their conversion rate, i.e., the percentage of proposals they have converted into sales.

Confrontation or rejection

Sales professionals strive to avoid confrontation and not to raise their prices; they assume that higher prices will upset customers and cause problems during the sale. They are concerned that customers will automatically reject their offers if prices are high. For sellers, high prices are uncharted territory and the unknown scares most people, including sales reps and executives. Most entrepreneurs can remember unpleasant encounters with customers who were upset by the price.

"Pricing is a sensitive issue and you will usually find resistance to any change you make."

Therefore, businessmen prefer to keep prices low, which is a big mistake. People do not automatically buy the cheapest products or services; they consider factors such as quality, reliability, reputation or brand appeal. Some buyers look for items with high prices because they assume that low prices imply a poor quality product.

Price Myths

The idea that customers only want the cheapest is a myth, as is the following:

  • A rebate from 50% is a rebate from 50% - Stores inflate the presale price of an item to supplement the 50% discount.
  • Prices must end in 9 - By ending at 9, this reflects a cash control mechanism that dates back several decades and is not feasible in the current era of electronic payments.
  • The best person to set the prices is the seller - Sales personnel are usually the first to want to lower prices to complete sales and most lack experience in pricing.
  • Setting prices is a decision made once a year - On the contrary, the more you plan and set prices, the more skilled you become.

"Don't be afraid to expose the value you are offering and always propose a higher value option at an increased price.

Most companies set prices incorrectly; some use the increased cost price, but then apply the same discounts to their customers that they receive from their suppliers, which eliminates the extra profit they could make if they were to maintain prices. Because customers do not know what their costs are, the cost plus price has weaknesses by nature.

"One of the key factors in pricing is using a number that demonstrates a degree of accuracy or certainty about the price.

Estrategias erróneas

Lower prices always mean lower revenue, but managers continue to try to charge less than their competitors. This strategy is doomed to failure as there are always companies willing to offer low prices. Smaller companies cannot compete for price with large discounters.

"You'll lose about seven times as many customers due to perceived indifference as to pricing issues."

Another mistaken strategy is to add a little more to the previous year's price, an arbitrary method: raising your prices by 3% or 4% annually does not mean you are increasing value by the same amount. The most misguided pricing strategy is to guess, without carrying out careful research or analysis. Never price arbitrarily.

Value-based pricing

The correct way to determine a price is to estimate the value of your offer to the customer and charge accordingly. Pricing by value does not relate to the cost of the product, the price of your competitors, your price one year ago, the prevailing interest, the rate of inflation or other related factors. The only important factor is the perceived value of your product or service to the customer. Customers will not buy your offers if the price is greater than the value they assign to it.

"Many business owners and managers feel constantly pressured by customers to reduce their prices.

Matching value to price requires careful thought and research and thorough analysis. When determining a price that reflects true value, test it to see if your customers see it the same way. It will be a process of trial and error. Increase your prices if you offer more value, for example, if you include collateral, offer better credit terms, or provide free installation.

"Many people avoid setting prices because they really don't know anything about it."

To earn more per sale, offer attractive packages or, for example, entry-level, intermediate or higher level options. Attractive guarantees reduce risks. This is a powerful sales incentive. The less risk customers take, the more they are willing to pay.

Reducing discounts

Let's not allow direct sellers to change our pricing strategies and discounting rules. This could be a challenge as customers currently expect rebates, but this seriously undermines profits. For most companies, discounts are one of the three main expenses, the other two being wages and product costs. Rebates are money given away. Every coin that you don't give away in a discount is an extra coin for our company.

"Most business owners and managers can't read the financial statements properly.

To prevent the sales from affecting our profits, let's have a special control. Let's ask our financial department reports monthly of the company's discount losses. Let's limit discounts by coordinating sales operations and monitor them so that we can reduce them.

Companies give discounts for four reasons:

  1. The others do. - This is the worst business reasoning imaginable.
  2. They think that the volume of sales will increase - In fact, big retailers are lowering their prices to open up space on their shelves.
  3. They invent the original prices to accommodate the discounts - This gives the customer the false impression that the vast majority of companies operate with a huge profit margin.
  4. Sellers rush to sell - Many of the salesmen do not have enough training and at the first sign of resistance from the customer, they switch to "discount mode".

"Reducing prices to get more quotes is rarely successful, but having a strong quote management system is always successful.

Los vendedores

Let's train our vendors in pricing and discounting. Let's establish role-playing in which they have to deal with discount requests. We must teach them to break the habit of making discounts in the face of customer resistance. They need to know that they have to be decisive and firm with customers.

"Most businesses are already charging less than the actual value perceived by customers."

Let's make sure they know that diligence, not price, wins out and that the best way to please the customer is offering a great valuer. We will provide our vendors with alternative product or service options to present to customers instead of just having a "take it or leave it" option.

"In big business there's a big gap between what the owners think is happening and what actually happens."

Gold, silver and bronze price options are effective. Let's train the sellers so that they possess the skills necessary to present the products and services according to their value.

Form a pricing team with the best staff from important departments, such as finance and sales, to assist you in this task. This team should update the company's pricing every quarter.

Earn more money

Follow these instructions to increase profitability:

  • Let's increase all prices by 5% effective next month.
  • Let's not give gifts. Let's add gifts to purchases; for example, free delivery on purchase.
  • Let's add additional value to the services by including complementary products.
  • Never use rounded prices like 100 euros, increase them slightly to 101.87 euros. This suggests that we have assigned a precise value.
  • Never use the increased cost price.
  • Change the vague descriptions to something attractive. Say: "Buy a fabulous new ... room for only ..." and then mention your price.
  • Let's add expensive options to your line to make less expensive options more attractive.
  • Let's add value to what you sell and show that value in your price list.
  • Let's offer attractive payment terms to make high prices more tolerable.

"There's always someone around the corner ready to do the same thing as us, but for less money."

To set prices you must know which products are the most profitable and which customers are the biggest buyers. Let's classify customers into A, B and C and get rid of the worst ones; they cost your company more than they report. As prices increase let's explain the change to the best customers. Let's update the accounts monthly. Don't let anecdotal information influence your pricing strategy. Research the prices of competitors' products and services.


Presentation is crucial. The more effective the presentation of our prices, the more sales we will achieve and at higher prices. In the retail businessesA printed price tag indicates a specific, carefully designed price. A handwritten label suggests less certainty and may lead customers to think that the price is subject to negotiation. Customers are uncomfortable with uncertain prices. In our presentation let us show clear and definite ideas. Many companies intelligently use targeted pricing to make customers buy more profitable products and services. One way is to sell high quality merchandise at a higher price. Before trying directional pricing let's make sure we know everything about your product. You should know in detail how much profit you make on a product, as well as the volume of demand for your sale. Determine the demand elasticity or price sensitivity for each item, so you know how much profit you make on your individual products.

Objective data, cost-effective approach

Smart pricing means success in business. Many managers cannot properly interpret financial statements, which affects their ability to price. Managers have to accept their lack of knowledge and seek out experts with business experience. Ask those who oppose you to present objective data that explains why the company should maintain the status quo. Let's focus on profitability, starting with pricing.

About the author

Peter Hill is a partner in Mark Holt & Co Ltd. and Healium LLP. He is also a speaker on topics related to pricing and profit enhancement.

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