Episode 81

The 3 Worst Pricing Strategy Mistakes and How to Fix Them

Learning how pricing mistakes might be affecting your bottom line and what to do about them. Pierce Brantley breaks down some of the common pricing mistakes small businesses make and how adjust for them. He takes his wisdom from Peter Drucker, the time-tested thought leader on business strategy. He also shares some insight on ways to make your pricing more attractive to the consumer. Buckle up for a nerdy, math-based episode and see if you might fall into one these price-setting sins.

This episode covers the topics of pricing strategy, marketing strategy, consumer pricing, competitive analysis, Peter Drucker, stewardship, and business management.


Transcript
Pierce Brantley:

Welcome to Lunch Break a special weekly series of the

Pierce Brantley:

Eternal Entrepreneur that gives you bite sized pieces of wisdom on how to

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build a function of faith and business.

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Each episode unpacks, a short, actionable topic you can put into practice this week.

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Let's get into it.

Pierce Brantley:

Well, hello and welcome back.

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Thank you for joining us for the lunch break.

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I am Pierce Brandley co-host of the eternal entrepreneur.

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How is everybody doing?

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I hope everyone is fat and happy full of Turkey and dressing and cranberry sauce.

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I know I have completely just abandoned my diet for deeper waters

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of gravy and mashed potatoes.

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And I'm not upset about it.

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I'm not upset about it.

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One, one iota.

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However, in preparing for Thanksgiving.

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I noticed something and you all probably noticed something as well.

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And it set the Turkey was too dang expensive.

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In fact, everything from gas to, uh, powdered, mashed potatoes,

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everything, the cost of everything has just gone up through the roof.

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And that got me thinking, I imagine in your own businesses,

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the costs of operating here.

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Have gone up as well, and that might have even impacted how you approach.

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Your pricing.

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And so I thought it'd be fun to do just kind of a quick sort of breakdown on

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strategies and mistakes that happen when we approach pricing as a small

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business and what we can do about them.

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So we're going to go through three major mistakes that businesses make in pricing,

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their products, and then a couple easy.

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Tactical strategies that you can use to kind of tweak it once,

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you know what those mistakes are.

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Sound good.

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Okay.

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Well stay awake.

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Fight that Turkey coma let's get started.

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So these three mistakes, these three pricing steaks were

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pioneered by Peter Drucker.

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Peter Drucker is a fantastic business model.

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And well, though, he's passed a lot of his wisdom still kind of rests with us.

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And one of the great things he explored was pricing.

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So the first pricing mistake he identified.

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These actually come from a larger body of work called the

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five deadly sins of business.

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The first mistake is feature.

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Pricing.

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So what is feature based pricing feature based pricing is basically

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where you continually add features or benefits to your service.

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And therefore you logically increase the price.

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So let's say you're a widget maker, right?

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You have five features and the next quarter you have six features in the

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next quarter, you have seven and so on.

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And so on every time you add a new feature, you add a new price because

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while you have more features in the competition, the problem is the consumer.

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Doesn't see.

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See it this way, nor do they care.

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There has to be a value to cost ratio.

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That's important.

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And normally it's small business owners or CEOs who kind of get stuck in this

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chapter thinking, but we have more things associated with our service or product.

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Therefore it's worth more.

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That's not true because you're not necessarily just selling a product, right.

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You're actually concerned with capturing a market.

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And so capturing.

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Is your most kind of, uh, forward thinking forward leading strategy,

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the price of the actual service as it relates to value is sort of secondary

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in that if you wouldn't add 50 cents to something every single time you add a,

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like a, like a new feature of some kind.

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So Drucker's sort of reference for this was Xerox.

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Xerox had new technology at the time.

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They were very pioneering company at the time.

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But what they kept doing was they would pile on features and they

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kept on raising the price of the product over and over and over again.

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And what happened you can imagine is that competition came in with a

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cheaper price that wasn't based off the number of features, undercut them.

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And because.

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As we know the laws of innovation kind of went into play.

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They were able to beat Xerox and Xerox, you know, no one

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even thinks of Xerox anymore.

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So that is feature based pricing.

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Stay away from it, focus more on, on capturing the market second

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charging what the market will be.

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So this is the mistake that I probably made the most when I was first

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starting off as an entrepreneur.

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In fact, I can remember, I used to kind of have a platform that talked

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about brand strategy, brand alignment, marketing, all of that fun stuff.

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And one of the things I would talk about often on that without even knowing

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who Jucker was, is you need to charge what the market can bear, whatever it

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can handle, whatever can shoulder, you put that yoke on it, and you will make

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sure the market carries it for you.

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And the problem with this one.

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And it does work.

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The problem is from a competitive strategy.

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It won't work for long because as we just kind of alluded to earlier,

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inflation is always a thing, changes and pricing dynamics based off of

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availability of resources or, um, low end disruption coming into a marketplace.

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All of these different factors impact.

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Your price.

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And so if you're just purely charging what the market will bear so that you

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can maximize profit, then what's going to happen is someone is going to be

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able to come in and beat you eventually.

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And so just go into that top in price, just because someone will pay for it

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and someone will always pay for it.

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Isn't a good long-term strategy because it ignores competition.

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And I'm not saying we should obsess about competition.

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Purely from like a, uh, I don't know, even like a cognitive bias

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perspective, but, but you should be thinking about it from the options

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that consumers have from price.

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Don't assume that they'll just pay more, uh, because maybe you have a

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better brand or a better perceived, you know, uh, price to value ratio.

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Uh, you need to price yourself competitively, um, that can still

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be the higher end of things, but it shouldn't be ultimately whatever.

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Someone can or a company or market can totally bear.

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It needs to be in context of all the options that are available to consumers.

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So that requires pricing, research, market research, secondary and competitive

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research to basically tweak that price to be a premium option, but not a overbearing

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option just for the sake of profit.

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Okay.

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We got it.

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Now last, certainly not least this is a fun, a tongue twister.

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Don't make the mistake of using cost driven pricing instead

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do price driven, costing.

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So don't do cost driven pricing, do price driven, costing.

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What does that mean?

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If you are a practical CEO, practical entrepreneur, very pragmatic type person.

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This one is going to be kind of.

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To wrap your head around, or at least be hard to swallow.

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I have no doubt.

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You can wrap your head around it.

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Cost driven pricing effectively says, go figure out what the cost of goods

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are or the cost of giving a service is, and then add margin on top of it.

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So, you know, if your widget costs $5, you know, increase it

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by 30%, if your services are.

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You know, $600 an hour, you know, blended then add another, you

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know, 25% or 10% on top of that.

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This is a mistake ultimately.

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And the reason is because it's, while it's, it's going to give you a

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profit, at least in the short-term, at least in terms of the math, again, it

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does not take into context that your business lives within the ecosystem

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of options that are available.

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To the consumer, even if you don't particularly think you have competition

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and he worked from this model, eventually someone will enter your market.

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And because it's purely markup based, so to speak, you're going to get undercut,

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or someone's gonna be able to offer more value at the same price because you're not

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taking into context, the total landscape of options that the consumer has.

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So this is good math, but bad marketing.

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So Drucker's advice in this is to do priced based costing.

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So if you're familiar with the book, uh, I can't remember his

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name now, but it's profit first.

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This is sort of similar to the profit first model.

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You need to set a price that is appealing to the consumer arbitrarily without

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thinking about your costs, by the way.

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So.

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Let's say your widgets costs $9 or $10.

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And then you typically mark that up, you know, 30%.

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So you're somewhere in the $13 to 1499 range, depending on how

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you kind of boil everything down.

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So that is an example of what you should not.

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What you should do.

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However, say what is most attractive to the consumer and, uh, you do in your

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own research, you figure out that 7 99.

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Or $8 net range is the most attractive thing to consumer that puts the impetus on

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you, the business owner to go figure out how to get your costs down, or possibly

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take a loss on what you're selling and then make up that loss on other items.

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So maybe your, your main product ends up becoming a loss leader,

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you know, in exchange for like add on services that are reoccurring.

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The point is your product.

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Live in isolation.

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Therefore the price of your product should be based off of incentive to the consumer

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and the driving needs of the consumer.

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Not purely on the math that makes your business profit.

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This requires you to be more innovative as a company, more creative as a company.

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And we'll really challenge, I think your executive team or those who are involved

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in kind of getting something out there to think through what a price should be.

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So again, the three mistakes that we're making pricing, our feature

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based pricing, where we just increased pricing based off the number of

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features, consumers don't care.

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Don't give them a widget with 10 things when maybe they only want five, uh,

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charging what the market will bear.

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Eventually someone will undercut you because you're continually

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pushing the roof on what is positive.

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And then cost driven pricing, which essentially is just math based markup.

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Again, it's good.

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In terms of operations, it's bad in terms of really understanding what

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is attractive to your consumer, you'll get beat eventually, even if.

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You know, looking that way right now.

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So those are the three mistakes real quick.

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I want to jump into a strategy that you can use to kind of, once you

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understand which price you should be, setting, how to make it more appealing.

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Now.

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No doubt.

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You're familiar with.

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Tactic, uh, because you've probably consumed things based off of it.

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However, I want you to think about how it can be applied to your business.

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And this is called charm based pricing.

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Now there is a litany, there is unending different ways to think about pricing

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strategy, and that really requires an in-depth, you know, study of your business

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in the market to get that exactly right.

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However, one of the easiest things you can do is charm based.

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And charm based pricing, particularly in the west is where we change the number

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to be more appealing to the consumer, completely arbitrarily to the costing and

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the actual sort of profit, because what we're most concerned about at this point,

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once we have our profits and our costs work out is not the profit of the cost.

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It's the appeal to the consumer.

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So advertising and marketing.

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Right.

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Are there whole own sort of segment of your business?

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However, pricing appeal needs to kind of fall underneath that category.

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Meaning your cost, your operational costs, your blended rates, your profit

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margins, all that type of stuff.

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Sit in one bucket and they shouldn't have.

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Tell you what your price should be for your product.

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They might inform the actuals.

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They might inform the, the, uh, the, the black lines and

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the red lines, so to speak.

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But the pricing psychology is what tells the consumer that you have something

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of value to them for their money.

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And so it needs to be a separate conversation.

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So time-based pricing is where you change the number.

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To be appealing to the consumer.

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Most oftentimes it's with ending in a nine and then using smaller numbers

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towards the end of the pricing.

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So what's incredible about this type of stuff is that you

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can actually charge more for.

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And that's because consumers, when they're looking purely at price appeal,

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they're making an emotional decision based off of how they feel about making a

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purchase, not how much it actually costs.

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And this is true, not just of department stores and, you know, fast food.

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It's true of your business as well, because they're ultimately just trying

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to make the best decision for themselves.

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And you live in an information economy.

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Price check things.

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So you need to give yourself the best chance of winning by

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making appealing looking numbers.

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So let's say that you find out based off of doing price-driven

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costing that, you know, you should be selling your product for $11.

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And then, uh, you know, and maybe previously you were

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selling it for, I dunno, $8.

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So that's great.

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You're getting a little bit of markup now, obviously, if you were to just

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compare the two numbers, arbitrarily eight numbers is less than a leaven dollars.

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However, if you charged $14 and 99 cents versus.

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$12 and 50 cents or $8 and 67 cents.

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Something like that.

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The $14 and 69 cents or 99 cents.

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I can't remember what I said is going to be more appealing to the consumer.

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And that's because of the way the numbers go down initially and then end

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in a number they feel comfortable with.

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So.

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What's great about the strategy is one, it's a marketing tool

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that really genuinely works.

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And then second of all, you can actually get more for your item or

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your service purely out of, um, that pricing charm working, even as you go

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up the scale in terms of costs to the.

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So they've done tons of studies on this.

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They've done like blind studies where, you know, they had people

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buy the same, uh, the same shirt, three different times, or at three

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different options to buy their shirt.

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And consumers would typically pay, even though they knew exactly what the

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price was, they would pay more money.

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For the shirt purely based off of the way the number ended.

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And they've tested this over and over and over and over again in different formats.

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And it pretty much holds true.

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At least in the west, we get an international sales, that stuff

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can be kind of blurry, but partly between grooming and the way we

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have it, like a base 10 system, the numbers are super pretty.

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So, okay.

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I'm beating the dead number horse at this point.

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The other side of price Chon based pricing is this.

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If you have a truly premium luxury product and you want people to feel

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as if they're buying a premium luxury product, then what you do is make sure

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that your numbers end in zero and.

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It doesn't matter if it's $10 or $150 or a thousand dollars, whatever CLE is,

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feel like bigger numbers, even $10 feels like more than 1299 because of the zero.

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It's just psychology in the west.

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So if you want something to feel more premium and, you know, from research

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that someone will pay it, then do that.

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It's also a good strategy.

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If you are in a competitive landscape where there are lots of premium options

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and you feel like your brand has good differentiation, what you can do is use

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this to kind of push that perception across the line just a little bit more.

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And people will feel as if they are getting something to higher end for

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their money, even if it's not necessarily true, or even if the competition

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kind of, you know, levels everything.

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Okay.

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My friends, I'm assuming you haven't been completely put to sleep

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between the Turkey and the math.

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If you're still awake and you still want to apply this, go do

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some analysis on your business.

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You will benefit from it.

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Massive.

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And I just think that's really good stewardship.

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Okay.

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My friends have a great week and don't forget to think you turn away.

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Thank you for listening.

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If you enjoyed the show, do me a favor and leave a quick review.

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When you do it helps other entrepreneurs find this content and

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Pierce Brantley

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