How many wrong prices are out there?

And what is the result of having the wrong price?

A reader recently asked in the chat channel:

I am curious about "wrong pricing" and a bundle of sub-Qs. Given the market pressures to reach the best price, why are some things under- or over-priced? How long can they stay there? Which is more common? (I suspect under, bc over will kill sales, while under is just lost opportunity?)

Is this more likely in certain sectors, or in certain types of businesses? Are small businesses less likely to realize they could raise?

I gave a brief answer there, but I’d like to expand on the question of “wrong pricing”. First, though, I’ll just note that the chat channel is now available to all subscribers. If you’d like to ask a question about pricing, click the “Chat” button on the menu bar above and start a thread. Or start a conversation among readers on a relevant topic.

What is a wrong price?

Let me start out with two anecdotes.

Recently I went looking for a professional service that I wanted to get for this website. I was worried it would be pretty expensive, and I had a mental budget, “I’m willing to spend up to $X” I got a couple of quotes and was pleasantly surprised to find that the cost was a third of what I was willing to pay.

Also recently, I was thinking about ordering out some lunch. I pulled up the menu from a nearby place, but when I saw the prices, I ended up deciding I’d just wait and eat when I got home because the prices were twice what I wanted to pay.

Was either of those prices wrong?

Not necessarily.

Any given price, for any given product, is going to be too high for some people while at the same time being less that other people were willing to pay.

I would argue that a price is only “wrong” when it:

1. Fails to convey the value which the seller is delivering to their core customer and/or

2. Fails to provide the seller with enough revenue and profit to sustainable maintain their business

How common are wrong prices?

Wrong prices are extremely common. You may think that as a pricer I am biased towards finding work for myself, but I have never worked for a company which didn’t have at least some prices on some products which were sub-optimal and could be improved.

Pricing is hard and finding the “right price” is a moving target. Moreover, depending on how you segment your customers into different quotes, pricing groups, or retail channels, there may be multiple “right” prices for the same product with different customers across your business.

There’s no shame in having some wrong prices, but it’s always beneficial to make them better, since this means more revenue, more profit, or both.

Is under or over pricing more common?

Both happen, but as the customer guesses, the market will take care of a certain number of instances of over-pricing.

If your price is too high, you will sell less of your product than you could with a better price. Your margins on the sales you do have are pretty good, but with the low volume your business maybe inefficient. It may be hard to get new customers or you may acquire customers and then lose them to lower priced competitors.

If you’ve had a persistent problem with your pricing being too high, it may be that you’ve mis-identified this problem as a problem with bad marketing or bad sales, blaming other part of the customer acquisition process for the fact that your pricing is too high.

Lowering your pricing might win you more business, and so even though your profit on each sale might be lower, your total profits would increase as would your efficiency due to more utilization of your resources.

An alternative to lowering prices would be to re-focus your customer targeting. Are you really charging more than your product is worth, or are you charging more than it is worth to many of the customers you’re talking to? Maybe your product has some attributes that certain customers really value but many others don’t care about. The customers who want that attribute are willing to pay your prices, but other more generalized customers are not. In that case, you need to zero in on the niche of customers who get the most value from your products and consistently target them. Then your pricing will no longer be “wrong” because you’ll be targeting a different median customer who appreciates your product more.

If your price is too low, you sell to almost every customer who sees your offerings. The problem is, while you have lots of business, you aren’t making that much money. So you’re constantly busy and getting behind, but it seems like you never quite have enough money.

If you increase your prices, you may see your sales decrease a bit, but you will be making more money while not having to work as hard. You’ll no longer be struggling to keep up with all your work, and you’ll have more money to pay your people and invest in your business.

I’ve particularly seen this in some small business owners who are working long hours every week and yet always behind with getting to all their customers. They have a lot of customers because their prices are very good. And they work long hours because it seems like they never have enough money. And yet, despite all that business and all that work, they feel like they’re constantly on the edge and struggling.

In that situation, the business owner would do well to start quoting consistently higher. They would win less business (some of the most cost-conscious customers would go elsewhere) but they wouldn’t constantly be working six or seven days a week and still falling behind on their schedules. And they’d have the money to hire good help and buy good tools and materials, plus be able to take some breaks once in a while.

Sometimes low prices are compensating for other problems with a company. If they have poor marketing or sales skills, or if they simply don’t invest much in finding new customers, they may make up for that deficiency by charging low prices so that customer who do find them always buy and spread the word, “You’ve got to buy from these guys. Their prices are so low!”

If you suspect you may fall into one of these categories, either in general or with a few of your prices, the best solution is to conduct a test. Try changing your prices in some situations, on some products, or with some customers and see if the result is better for your business. If so, you can expand the change to the rest of your business.

Or if you need an outside set of eyes, get your friendly neighborhood pricing professional to take a look at things.