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Top Tips to Better Pricing

By: Rafi Mohammed, PhD
Posted: May 27, 2011, from the June 2011 issue of Skin Inc. magazine.

Pricing is one of the most powerful, yet underutilized strategies available to businesses. A McKinsey & Company study of the Global 1200 found that if companies increased prices by just 1% and demand remained constant, on average, operating profits would increase by 11%. Just as important, price is a key attribute that consumers consider before making a purchase.

The following pricing tips can reap higher profits, generate growth and better serve clients and consumers by providing options.

Stop marking up costs. The most common mistake in pricing involves setting prices by marking up costs. Although easy to implement, these “cost-plus” prices bear absolutely no relation to the amount consumers are willing to pay. As a result, profits are left on the table daily.

Set prices that capture value. Manhattan street vendors understand the principle of value-based pricing. The moment that it looks like it will rain, they raise their umbrella prices. This hike has nothing to do with costs; instead it’s all about capturing the increased value that customers place on a safe haven from rain. The right way to set prices involves capturing the value that clients place on a product or service by thinking like a client. They choose the product that provides the best deal: price vs. attributes.

Create a value statement. Every company should have a value statement that clearly articulates why clients should purchase their products and services instead of competitors’ offerings. This statement will boost the confidence of your frontline so its members can look clients squarely in the eye and say, “I know that you have options, but here are the reasons why you should work with us.”