Five Pricing Pitfalls Small Businesses Fall Into
Pricing Pointers, Issue #69
Pitfall 1: Unintentional discounting
The Safeguard: Filter for price sensitivity with inconvenience hurdles
When you give a price discount to anyone who asks, you train your customers to hold out for a lower price, despite the fact many of them are willing to pay more.
This first idea is going to sound counter-intuitive because everyone assumes we should be trying to make it easier to buy from us, not harder. However, creating some friction allows you to serve price-sensitive customers. And it does so without sacrificing margin on your full-paying, convenience-focused buyers. Things like having to mail in a form or wait in line filter out buyers who are willing to pay more to avoid the hassle.
Pitfall 2: Underestimating discount math
The Safeguard: Calculate your volume hurdle before cutting your price
Small business owners often cut prices hoping for a sales boost. It’s easy to overestimate how much a price cut will increase your sales.
Doing some “breakeven” math before cutting your price can be eye-opening. Suppose, for example, you sell a product that has a 50% margin, and you cut its price by 5%. Then you’re going to need an 11% increase in unit sales just to maintain your current profit level. A 10% price cut is going to require a 25% increase in your unit sales.
Can you clear that sales hurdle? If not, you’ll just end up working harder for less money.
Pitfall 3: Ignoring pricing psychology
The Safeguard: Use anchors to guide customer choices
We buyers aren’t as logical and objective as we think we are. Our purchasing decisions are often influenced by things that shouldn’t seem to matter.
You might assume adding a premium offer is a good idea only if people buy it. But that’s not always true. Here’s why.
One way we judge the value of an offer is to compare it to other things. Adding a high-priced option to your line-up creates an anchor, or comparison, price in the buyer’s mind. By comparison, this high-end price makes your middle offer look like a bargain. That shift in perception steers customers away from your entry-level version.
Pitfall 4: Treating pricing as static, not dynamic
The Safeguard: Adjust your pricing to manage demand spikes
A business with limited staff or space suffers from wasted payroll during slow hours and lost sales during peak hours. If that business views pricing as just a revenue generator it’s overlooking a powerful tool to make better use of its existing capacity.
Implementing dynamic, or peak/off-peak, pricing isn’t about gouging customers. It’s a tool to shift price-sensitive customers to quiet, underutilized periods.
Doing this has two benefits. First, it increases the return on fixed overhead. Second, and this is the overlooked one, it improves the customer experience by reducing service congestion during peak hours.
Pitfall 5: Confusing top-line revenue with profit
The Safeguard: Evaluate your product mix with a contribution margin audit
It is easy to fall in love with your best-selling products without understanding their true contribution to your bottom line. You might be shocked to discover that your flagship product is a “profit drag.” In fact, it may generate less in sales revenue than its direct, avoidable costs. When that’s the case, eliminating that item from your product mix would increase your bottom-line profit.
Caveat: The big counter-argument is how much in follow-on sales it generates. “We don’t make much on X, but people who buy X also buy Y, and we make a lot of money on Y.” But businesses tend to overestimate this effect.
Conducting a contribution margin audit reveals which products are true profit boosters versus hidden profit drags. Knowing that, you can stop wasting resources on money losing offers and focus on your most profitable products and services.