Just last week, I was driving in town and spotted an old college-mate; a male college-mate. He looked so exhausted by the roadside. Since I was rushing, I didnÃ¢â‚¬â„¢t stop. Surprisingly, however, on my way back one hour later, I still saw him there. I then pulled by to see if he needed help. He was waiting for his wife to come and pick him up. I was rather surprised because he had a very successful car hire business and used to have a couple of personal family cars – something was not adding up.
I later learnt his business had folded-up. I genuinely sympathised with him. My consultancy firm had used his vehicles a number of times. Most of his cars were new but were probably the cheapest in town.
This takes me to the gist of our discussion today. What went wrong with this colleague of mine? One point protrudes higher than the rest Ã¢â‚¬â€œ pricing strategy.
As Tim Berry, Founder and President of Palo Alto Software rightly put it, pricing is magic. There is no proved general formula that can work the same for you, me, or any generalised group. You will usually set your pricing as a matter of situation, strategy, costs, competition, weather, and at worst using instinct or all of the above.
While I canÃ¢â‚¬â„¢t really tell you how to set your pricing right, I can at least share something that IÃ¢â‚¬â„¢ve learnedÃ¢â‚¬â€in lecture rooms, in making mistakes, in growing my own consultancy firmÃ¢â‚¬â€about how NOT to set your pricing.
Here are the three most common pricing mistakes that I see. And, just to be clear, while I wish I could drum up some rigorous research to back me, this is based on anecdotal evidence, common sense, and years of dealing with business problems.
First, take note that one of the most damaging cliches in business is the idea that the lower price gets the highest sales volume. The whole Ã¢â‚¬Ëœlower price equals higher volume ideaÃ¢â‚¬â„¢, a fundamental law of economics, is for very similar commodities only. If lower prices play the trick, then why isnÃ¢â‚¬â„¢t the cheapest car made the most popular? Instead it is the expensive Benz, BMW, and Lexus that are the most sought after brands.
Successful lowest-price strategies are not common. This is because they usually take a lot of capital, resources and visibility. What works for the big supermarket shops that sell and order in bulk cannot work for the hawker around the corner that sells just a few items. You need to sell a product at a price that will offer you profit. But if competition is stiff, then you canÃ¢â‚¬â„¢t sell. You then need re-package your product or fold-up and start a different business.
Secondly, we forget way too oftenÃ¢â‚¬â€and too soonÃ¢â‚¬â€that price is the most powerful marketing message you have. Do you think people donÃ¢â‚¬â„¢t buy your good or service because itÃ¢â‚¬â„¢s expensive? But isnÃ¢â‚¬â„¢t it worth it? DonÃ¢â‚¬â„¢t you believe in it? ItÃ¢â‚¬â„¢s about positioning. How are you different from the others? Is what you sell better than the one across the street? Does your price say so?
This reminds me of my experience last year. I lost a consulting job I really wanted because I did bid $100 lesser than the market price. The lady who gave me the bad news told me everybody liked my proposal, but they wanted the best, so they went for the higher price. A market or higher price is often synonymous with a better service and superb quality job than otherwise.
To put it more practical, what would you rather have for lunch: a K100 pack of chips sold in the open air by the roadside or a K500 well packed box of chips from a Take-away Shop? We used to go to a restaurant that had really good food and surprisingly low prices. But I often wished they could raise their prices so we didnÃ¢â‚¬â„¢t have to wait 45 minutes or more to get a table. And guess what: they no longer exist. They went out of business. Do you think pricing had something to do with that? I doÃ¢â‚¬â€their prices were too low to match demand leading to lengthy waiting times as well as compromises in quality.
Lastly, businesses go under when they run out of money. Still, just betting on what IÃ¢â‚¬â„¢ve seen with my own eyes over the years, I think businesses frequently run out of money because they underestimated real costs.