How To Get Product Pricing Right

It is a common practice for some retail outlets to put up a ‘sales promotional’ sign all year round without actually implementing any discounts on their goods.
As a result, when the festive season approaches, the customers cannot differentiate the real price from the discounted prices.
Experts note that customers’ decision to buy something at the offered price or not depends on more than the trade-off between benefits and the price.
They add that customers’ decision depends on their expectations and experiences as expectations drive behaviour, especially when setting prices.
Experts also observe that in most cases, more time and energy is expended on customers who offer the least reward while only a small number of customers contribute the most to the business profit margin.
Therefore, reviewing the pricing can be the best way to get rid of unprofitable customers and at the same time improve customer relationship.
A report by Deloitte says pricing policies empower companies to manage customers’ expectations and avoid the cycle of discounts and giveaways that hurt the business profits.
Increased sales at discounted prices
The report titled, ‘Stop reacting to customers price expectation, manage them’ – notes that a policy of regular predictable discounting has trained many retail consumers to wait for the sale-price, and often, volume of sales at regular prices are less than expected.
As a result the amount of inventory that ultimately will be sold at the lower sale price will increase, it adds.
In a business-to-business model, the report states that the same dynamics play out because professional buyers have learnt to hold their purchases until the last couple of weeks of each quarter when sales managers are willing to discount more deeply to achieve their quarterly goals.
Moreover, it notes that sellers in these situations see the increasing portion of their sales made when prices are discounted as a sign that customers are becoming more price-sensitive in their brand choice.
Perceptions about price and value
Some consumers actually equate a product with a higher price to one with greater quality and value, the report says.
It adds that if these category of customers are the most likely to be attracted to such luxury products sold in a specific location, then the sales manager may increase profit margin by choosing a price that communicates to them that the product or service is well worth the extra money they will pay.
Price reduction increases sales volume
Obviously, a reduction in the price of products usually increases the volume of the products sold due to increased patronage, experts note.
Deloitte explains that increasing prices may lower sales volume only slightly, helping the business manager to make up for decreased volume with higher total profits generated by higher margins.
It notes that lowering prices can increase profits if sale pushes up significantly, thereby decreasing the overhead expense per unit.
It advices that the market’s response to price increases should be tested by changing prices in targeted areas before instituting a general price increase.
Setting prices based on policy
According to the Deloitte report, a key to improving customers’ price expectations is thoughtful pricing policies because sellers need policies to ensure that they do not pay too little relative to the value they deliver.
It adds that a pricing policy must state explicitly the criteria that should be used when deciding whether a sales manager can exercise his or her authority to grant a 10 per cent discount.
The report explains that the process of developing good policies involves treating each request to create or change a policy that could be applied repeatedly in the future, adding that the more requests, the more likely it is that a fundamental price structure is in need of review. The request must be applied the same way by all sale managers to all similar requests.
The report notes that policies are the responsibility of management at the market level.
It also states that pricing policies cover more than just discounting, they include the company’s pattern for passing along changes in raw material costs and its pattern for inducing products trials; it also deals with how a company will respond to low price offers made to its customers by a competitor and influences how the sales representatives sell and which ones succeed.
The report states, “Creating polices is not just the responsibility of the sales representative, or a local sales manager, since they do not have the perspective of the overall market or the long-term incentives to optimise the balance between immediate and long-term profitability.
“Ideally, policies are transparent, consistent and enable companies to address pricing challenges proactively. If your policies are transparent, customers need not engage in threats and misinformation to learn the trade-offs you are willing to make.”
Pricing policies has competitive advantage
The report states that over time, a company’s policy can be a source of competitive advantage creating expectations that drive better behaviour on the part of customers and competitors while empowering sales representative to offer creative solutions more quickly and with less wasted effort.

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