Common Pricing Strategies and Why They Fail
Pricing represents a strategy to increase sales volume at a profit, while incorporating and communicating critical messages about the value that the offering delivers to the customer. This involves much more than setting prices. Even organizations that invest considerable effort in establishing prices frequently leave money on the table. Let's take a look at the four principal pricing strategies and why they are limited--and often fail.
Price to Cover Costs
Companies use this strategy to set prices based on costs plus a reasonable margin. It makes sense to do this, because if you always price to provide a profit over your costs, you'll make money. Right? Not necessarily. There are two problems with this approach. First, your customers don't care about your costs. They care only about the value you deliver. By ignoring the value that you create for customers, cost-based pricing can keep prices lower than they should be, thus leaving money on the table and reducing profits. On the flip side, pricing to cover costs can actually keep prices higher than optimum, thus reducing sales. The second problem with cost-based pricing is that it allocates overhead and/or fixed plant costs into pricing calculations. Sounds reasonable, until you consider that often those costs appear to be variable when they aren't. If you have low utilizations, your allocations are going to be high, preventing you from dropping the price to increase sales and subsequently the utilization. Again, you either forfeit profits or sales. Sometimes both.
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