Here at Vision Insight we do a lot of work on pricing – pricing sensitivity, margin protection, what-if scenario’s, discount testing etc, and we come across a lot of disastrous decisions relating to pricing and margins, so we thought it would be fun to share a few of our very favourites! Whatever you do, keep your profit levels high by avoiding these surprisingly common pricing errors:
1) Selling a product at a loss. Now barring supplier-funded deals, these have to be a no-no. Why anybody would ever want to sell a product for less than it costs you to manufacture or purchase mystifies us… once shipping and overheads are then further taken into consideration, you may have to sell 2, 3 or 4 more products on top to break even. This is more common than businesses’ think, and usually caused by stealth supplier increases than any conscious decision by the business, but it’s more common than you may think – avoid!
2) Setting bonus targets on margin alone. We saw this some years back at a wholesaler and could barely believe what we were hearing. To achieve target all the individual store or branch had to do was to sell 1 item. At a very high margin. This then led to loads of orders being rejected for being low margin, leading to reduced sales and reduced profit overall. If you are mindful to increase margin and want this included in your bonus targets, be sure to include additional elements such as turnover so that sales don’t go south!
3) Selling higher-quality items at the same price, usually because of a lack of product knowledge. Again, a practice much more prevalent than you may think. We like to use the charity-shop analogy. A typical charity shop receives all different types of items with such a varying degree of value that errors are a virtual guarantee. Of course, there isn’t always a guarantee you’ll find that Armani suit for £5, or those Jimmy Choo’s on sale at £3, but this is a classic example of a disconnect between value and ticket price. Many large retailers simply have so many SKU’s they begin to lose track of the perceived value, so end up guessing, following too-restrictive fixed margin % rules, or just lumping similar groups of products all onto the same price point. Good sensitivity testing can help break these trends.
4) Setting a price too low. This has to be the single biggest mistake many businesses make. Once a price has been set too low, it’s oftentimes a lot harder to increase the price than it is to do the reverse and to decrease it. You have to be able to find the sweet-spot between too high and too low to be able to make maximum return from your sales.
5) Double-Discounting. This can be caused by a multitude of different situations, but usually this comes down to a combination of two key factors. 1) Poorly designed and specified IT infrastructure allowing the multiple discounts, and 2) Lazy deal creation by whomever is responsible for executing the marketing campaign. Linked to point 4 above, double-discounting is simply giving margin away – consumers are 9 times out of 10 unaware of the double discount until they get to the EPOS system or online checkout stage, meaning that they are willing to spend more on your product(s) than you’re charging. Discounts are powerful tools, but double-discounting should be avoided at all costs.