Pricing: so important, and still so easy to get it wrong

There are multiple “moments of truth” when making a sale: when we seek information about the product, when we first consume or use the product, and when we talk to our friends about our experience with the product.

But it is hard to picture a more crucial moment than when we have to decide to spend our hard-earned cash to obtain a desired new shoe, or a personal computer  because between the desire and the product lies the price. Every research and development effort, production value, communication, store design, customer service, would be in vain if in that moment, the client perceives the price as being superior to the value of the item, or would be wasted (partially, at least) if he/she would have bought it at a greater price.

Pricing is the hardest part

Getting the price right is not easy. First of all, it depends on the sales volume, which depends on the price and so on… Besides the math, it also depends on psychology and it even influences our perceptions: the more we pay for something, the more we like it.

Price can be a strategic weapon to conquer a market share, like the Japanese motorcycles made in the US in the 50s or used as a “bait” to attract customers to a store… but putting it plainly, if you can charge just 10% more, you can almost double your profit.

To base price on cost is a mistake.

Most small business owners that we know use a very basic strategy: charge double of what they pay to their suppliers and find a way, if necessary, to match the competition lowering their prices. Between the lack of conscience of all the costs and the tendency to use only discounts as a convincing maneuver, profits will normally be placed on a subsistence level. When things go well, businesses survive; when things get worse, they close shop, usually leaving debts behind. We also witnessed businesses fail because they engaged in a price war with the competition.

But our entrepreneurs do not make these mistakes by themselves. Peter Drucker, the father of management science, placed, in 1993, the “cost-based pricing” as one of the 5 mortal sins of American companies (registration required). In truth, 3 out of 5 sins mentioned how pricing was made!

Learn from who knows how to sell

ADC decided to help its public by inviting a professional that became successful selling luxury and premium items, where high prices are – counterintuitively – an essential part of the product value: Carlos Ferreirinha, who has already been president of the Louis Vuitton Brazil and is now the head of MCF Consultoria.

The most important businessmen and businesswomen, when make references to Carlos, use the word “magic”, so we are very anxious to learn some of this magic. Thinking back on Drucker, his advice could also be interesting for entrepreneurs who aren’t only owners of small companies…

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