Why pricing is a profit leaking paradox

Don't say that word too loudly - Price

There are many words that society has placed taboos around.  Each society has words that are unacceptable for whatever reason, that people are uncomfortable in using in public.

In business there is one word that makes most business owners so uncomfortable they don't often feel like discussing it even when pushed.  And it's not a four letter one either.  It is...... PRICE.  More specifically what their prices are and how they set them.

So what is so difficult about your price?

You must remember that the price is where all of your marketing investment meets the moment of truth between your business (the brand/product/service) and the customer, the results of which you measure in your financial statements.

Yet four different factors come into play.

The first factor is that companies habitually charge less than they could for new offerings or indeed for most offerings.  It's a terrible habit.

The second factor to be contended with is that Marketing identifies Price as one of the four key 'Ps" in the marketing mix but there is little linking of the marketing aspects of price to the financial side of the business in terms of decision making.

If you have a poor result for the year, your accountant is just as likely to say "Raise your prices?' without any consideration of the impact of this on your position in the marketplace.

There is a third factor to take into consideration - that of fear, your fear, fear of losing your customers if you raise your prices.  Is this you?  It's an affliction that affects most small businesses.  And all the time costs are imperceptibly rising.

Finally how much time do you spend considering your pricing strategy and how you set your prices?  Most small business owners and managers spend less time considering their pricing strategy and how they set prices than they do considering whether they should sponsor their child's sporting team.  Yet it's a complex business.

Why is effective pricing strategy so complex?

The complexity comes from the process, or lack of process, that small business owners and managers use in determining their price.  Pricing decision making in the marketing context is often done with a great deal of uncertainty and dismay, if it is done consciously at all.  For most businesses, pricing is a profit leaking paradox.  Hand on your heart, can you say whether you set your prices:

  • According to a set formula or plan, with a proper understanding of your costs;
  • Simply price to cover your costs (do you really know them)? or
  • So you won't be seen as too different in your market place.

Why is it that some businesses don't want to be seen as different from other businesses in their market place?  In fact, if you are not able to differentiate yourself from your competitors, then you had better have very, very low prices, because that is all the customer has to base their decision upon.  That will be the only factor they will have to determine value.

In fact when you set your prices do you:

  • test the results, or test different price levels
  • do so to maximise profit for the company or to maximise value for your customers?


What is the underlying problem?

Price is actually not the problem.  Instead it is the lack of understanding of different pricing strategies that confuses owners and managers.  And the lack of understanding leads to ineffective pricing strategies, or the wrong pricing strategies.  And poor management of price diminishes your profitability, and eventually puts your business at risk.

Let's take an example.

Discounting is one pricing strategy that many small business owners follow when they want to boost sales.  But think about it.  Will slashing your price, without slashing your costs, really do much for your business?

As a colleague, Mark Silver puts it, discounting assumes that:

1. The difference in price between your 'regular' price and the discounted price is what is stopping your customer from buying (i.e. your product doesn't represent value);

2. It's worth it to acquire a customer whose most important consideration is how cheap your offer is.

If the price is the problem, you've done a not so-good job of demonstrating the value you provide.  Competing on price alone means that you see your product or service essentially as a commodity.  If you see it as such, then customers will certainly treat it as a commodity.  And then you had better have very low prices.

Discounting may boost sales, at least for a short while, but it certainly won't boost your profits, or the long term sustainability of your business.  Reducing prices is usually an unsound long-term strategy that makes it more difficult to be profitable.


Price is a positioner.  What is meant by that?  Market position is the perception that customers have of your brand/product/service in the market place.  Now you can let customers decide for themselves, or you can use the ‘marketing mix' of product, price, promotion and place to create your position.

In a recent case study a US College was losing enrolments.  Part of the problem was that their prices were lower than other similar colleges, leading parents to think that the tuition provided was not of the same quality. 

Increasing their prices significantly, along with some improvements in packaging, lead to a significant increase in enrolments.  The prices changed how the college was perceived.

And that is the issue.  People often perceive low prices with low quality.  For small businesses, which by their very nature don't have large volume sales, is it better to seek sales with a higher perceived quality and value.  It all comes down to the pricing strategy you have decided to follow. 

Or as legendary marketer Zig Zeglar put it aptly "I decided long ago I would rather explain price once than apologize for quality forever."


Whichever strategy you follow there are three key principles to always keep in mind.

1.       The first pricing principle is not to undervalue/underprice your products or services.  Remember you are in business to make a profit to stay in business and make at least an acceptable living.

2.       The second pricing principle is that price is not only the amount on the ticket but also includes other influences on price such as discounts, allowances, and credit terms.

3.       The third pricing principle is to set prices in order to maximise profits, not to maximise sales.

The key to profit is not just the numbers, sales, and frequency.  At some point you need to look at fixed and variable costs vs. income.  If costs exceed income on every unit sold, you will never see profit no matter how many you sell.  On the other hand, you can make a decent living on low volume if you price your service right and provide high value.

If you consistently follow these principles pricing need not be a profit leaking paradox.  And it will be a word you can discuss in public.







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© Adam Gordon, Profits Leak Detective