The 5 Myths and Mistakes of Pricing – Mistake #2 – Basing Prices Based on What You Need to Make a Profit

May 15, 2018 The 5 Myths and Mistakes of Pricing – Mistake #2 – Basing Prices Based on What You Need to Make a Profit

A Product With High Perceived Value

Mistake # 2 – You price based on what you need to make a profit

It may seem that figuring out how much to charge so that you make a profit and then pricing accordingly is a reasonable pricing strategy.  However, if you try to charge more than what many customers are willing to pay, you may not sell enough to get the revenue target you have in mind.

Remember that at a given price and an assumption of unit sales volume will give you a revenue projection.  That unit sales volume assumption will translate to a set of costs.  The difference will give you a projected profit.  But if the price (or in reality the set of prices you set) is too high, you will not reach your revenue target, but you may also end up with too much inventory and costs that are higher than you expected.

You always need to set prices at or below the perceived value of what you are selling.  Perceived value is what a prospective customer believes the value is.  If the perceived value is too low to justify the price you need to make a profit, take action to increase the perceived value.  This could take the form of more effective advertising, more attractive packaging, or even gaining celebrity endorsements.  You could provide a warranty that would signify a higher quality product, one with a longer useful life or a lower long term cost of ownership.  If necessary, you may need to improve the product or service so it is worth more in the eyes of your prospective customer.

You don’t have to be a pricing consultant to understand there is a limit to how much you can charge.  To learn more about pricing see our page on pricing at https://apollogr.com/optimize-pricing/.

Bryan B Mason

Apollo Consulting Group, Providence, RI