(SEE ALSO: WHEN TO DROP PRICES.)
Overpricing is possible, but is uncommon. Usually businesses are in such panic about their pricing that they underprice, not overprice.
Businesses are worried that their prices are too high and will scare away their customers.
Despite this worry, though, many a business has reported that increasing the price has led to the opposite affect.
They actually made more sales, not less, and at a better gross margin.
The old adage “you get what you pay for” kicked in for them, and their customer’s perception of their quality was enhanced by a higher price.
Here are some indicators that you may be overpricing:
YOUR COMPETITORS HAVE LOWER PRICES.
This is no sure fire way to determine that you are overpricing.
Competitors may be pricing so low that they are going out of business, and you may be blindly following them out of the market because, at the same time, you assume they know more about how to price products than you do.
If all your competitors are cheaper – and price is the primary or only factor involved in choosing your product or service – then you may need to look at how your price points fare.
This assumes that your products compare with competitors of course. If you are confident that you offer more value than competitors, you should not be afraid to say so and charge accordingly.
In the business-to-business market, for example, delivery is often a much bigger issue than price for purchasers. Guaranteed supply or delivery on time may be sufficient factors to charge a premium over competitors.
YOUR MARKET HAS CHANGED BUT YOU HAVEN’T.
When products first come onto the market, it is common for them to be charged at a premium. There is no competition, so incumbents can charge whatever they like (within reason). As markets mature, normally because competitors enter the market and the customer gets more educated about the choices available to them, the pricing tends to be sharpened.
If you are pricing a mature product at a growth phase product price point, it may be that you are overcharging.
GROSS PROFIT MARGIN.
If your gross profit margin is going up, but your sales aren’t, it would indicate that your profit is improved. This in itself is not a bad thing.
Businesses though can get carried away in the excitement of making a lot of profit. The temptation is to upscale operations, hire more staff, get bigger premises and sales forces (and add to the costs of the business).
If, though, your gross profit margin is outrageously large, you will attract new competitors into your market who look to take a slice of the action from you. They will attempt to do this by undercutting your pricing. Be diligent that you do not upscale on the basis of unsustainable pricing.
CUSTOMER, DEALER OR SALESFORCE COMPLAINTS OR FEEDBACK.
(See also my post: When To Drop Prices.)
Everyone complains about pricing – but this doesn’t mean your pricing is too high.
If there is no whining about your pricing, chances are good it’s too low.
As a first instance, if your salespeople are complaining that your pricing is too high, ask them for proof.
Proof includes written competitive quotes – not hearsay, mumblings or Chinese whispers about pricing.
You need lots of documented proof, not one or two quotes here and there.
You need to see contract clauses – and pay special attention to hidden charges such as penalties or exit fees.
To be sure of overpricing, you need to establish a pattern because most markets have a range of suppliers offering comparable products and services at different price points so one or two different quotes may be perfectly normal practice.
Then you need to be sure that they are actually receiving the orders and shipping the goods.
Sleuthing about, collecting competitive information can be easily done and you don’t need illegal wire taps to achieve it. Just drive by the competitors premises and see how busy they are.
Alternatively, call them on the phone to find out if they have stock at hand and what it costs to buy. Many companies will tell you this over the phone.
(Be aware that asking too much information can be risky though. You don’t want to be accused of collusion.)
Ask around the industry. There is a lot of information you can collect by simply keeping your eyes and ears open.
Sales volume could be an indicator that competitive pricing is hurting your business.
If your competitor is growing market share at your expense, and the only point of difference between products is price, then it can indicate an overpricing problem.
It can also, however, be due to an untrained salesforce who do not possess the skills required to sell your product at its price point.
There are many other reasons too why sales volume can decline so you have to act cautiously if you think that sales volume is an issue.
Feedback including customers not believing your price, or double-checking your price, or asking lots of price-related questions may give you an indication that people are struggling with your price points. You’ll need to use your judgment to work this out.
A WORD OF CAUTION: be selective whose complaints you listen to.
This is because the people that complain the loudest about pricing, the customer, your dealers or your salesforce, all have vested interest in getting you to reduce your price.
The customer wants to think they have squeezed a bargain from you (irrespective if you’re the best supplier they’ve ever had). They don’t want to feel “ripped off” anymore than the next guy.
The dealer needs to make a margin on the products sold.
He or she needs to be able to buy it at a price point that enables them to add this margin before reselling to final end user.
The cheaper the wholesale price to them – the better enabled they are to add a margin and remain competitive.
Finally, it’s much easier for a salesperson, many of whom are rewarded on commission, to get paid if the price is reduced.
Most products are easier to sell when they are cheaper to buy.
Responding to Overpricing
Before you uniformly slash your prices because you think you are overcharging, don’t be afraid to first test some alternative pricing methods that may allow you to hold your premium price point.
Here are some suggestions:
MAKE IT HARD FOR CUSTOMERS TO COMPARE PRICING
This could be through bundling with other products or offering bonuses such as a percentage off the next purchase. It could be because you change something core about the way in which the product is offered, such as offering home delivery when competitors require you to come to their offices and so on.
Add value to the product to justify its premium price point. For example, offering after sales support, free consultancy, extended warranty and so on). Think creatively about what you can offer.
MILK CASH COWS.
Products become mature when they have been around for a period of time and there are plenty of competitive alternatives available. Generally, businesses have become dependant on the revenue generated by these products. If this is your situation, it’s time to milk the cash cow.
BUILD YOUR BRAND.
Build your brand especially if you operate in an industry where brand credibility is important (and this applies to virtually any industry that requires its customer to give some thought to the purchase decision). The higher the need for credibility (because the higher the risk to the customer in making a bad choice), the greater the opportunity to build your brand to facilitate your selling process.
TRAIN YOUR SALES FORCE.
Luxury item salespeople know that the customer doesn’t need to buy their product. Their job is to explain to the customer why they are getting value for money by investing in a high-priced item.
Equip your sales people with tools to help them to sell the products. Sales tools can include cheat sheets that prompt salespeople with messages about how to respond to pricing feedback or queries from customers.
TEMPORARY PRICE POINTS.
If all the above fail, offer temporary price points. Temporary price points are discounts or short-term sale offers that encourage customers to buy the product from you for a limited time (which could be a matter of days or until the stock runs out). You must be very careful entering into the temporary price point environment since, once in, it’s very difficult to get out again.
If you decide to drop your prices permanently, you’ll need to manage this process.
You will need to explain to your customers why your prices have been dropped so that people that have bought from you before the price reduction do not feel ripped off.
One of the reasons you may be able to reduce prices is that your own costs are reduced.
For example, some businesses are able to pass on cost savings to customers when their own costs reduce.
This includes banks (when the Reserve Bank reduces the cash rate) or petrol stations (when international crude oil barrel prices drop).
READ: More about pricing strategy.