price wars

In my blog entitled What Key Things Must An Entrepreneur Know About Pricing, I wrote about various pricing methods and approaches such as cost-plus, penetration, premium, incremental, promotional, luxury, value-based pricing etc. I also explained something about the impact of overheads on pricing, and some aspects of the margin and mark-up. That article followed my earlier one entitled What Key Things Must An Entrepreneur Know About Business Profitability, in which I wrote about revenue generation, fixed and variable costs, the break-even point and the management of the inter-relationships therein.

Today, I thought I should expand a bit on the aspect of pricing. Being an entrepreneur, I believe you already know the importance of pricing to your enterprise. Don’t you? There are some folks who have very good business concepts and models but they just mess up their pricing strategies entirely, and often come back crying that the business is not generating enough revenue. Of course there might be other factors contributing to this, but I would like to elaborate more on the pricing aspect. So, what are other pricing tips that an entrepreneur should consider?

  • Pricing determines the initial market entry and performance of the product or service. I wonder whether you have ever seen or experienced some company’s spectacular product or service failure due to pricing mistakes. Pricing is very critical when you are just entering a market, and if you are not careful about it, the market will psychologically blacklist you products or services. It depends on the perception they get in terms of the value of the product. Even when you have leveled up and have been promoting the product over some years, you have to be tactical about pricing. Wrongly handled, the product or service may not grow into a cash cow, or on the other side, you might miss the opportunity to make some good money from it. Got it? There are no hard rules, but if you have done some market research for your product or service and also have an idea of what comparatives cost, you should have a good starting point.
  • The market psychologically associates your pricing with several things regarding your business. My dear entrepreneur, you need to know that the quality, performance and delivery, grade, perfection etc. of your products or services and your entire business creates an impact in the minds of people. Don’t be deceived that people buy because they need something. In fact, the products and services that really make big money today are more of lifestyle and luxurious items, not necessities. Being cheap is not the answer, as this could be associated with poor quality, etc. You might not be able to cover your costs and also find it very challenging when time comes for you to raise your prices. Some people might not like your products because they look cheap. Don’t you agree with me? Let me tell you my own story. I have oftentimes refused to buy some things because I think they are way too cheap. Now, get me right here. I’m not proud, and I don’t have much money to splash around. But my gut feeling sometimes tells me something is just not right. There are also consumers who might think cheap products might be fake, etc. Likewise, don’t be too expensive just for the sake of it. You might strike a wrong cord. There could also be a mismatch with your aura, business packaging and carriage. Just imagine a business consultant in a worn-out coat or suit, in some low grade down town rented office, charging super highly. You might make people run away due to high fees in such an environment. Do you understand me?
  • You can use dynamic pricing as demand pattern changes over time. Please don’t run away because I’m beginning to use some marketing terminology here. We shall go slowly on this. Dynamic pricing, also referred to as surge pricing, demand pricing, or time-based pricing is a pricing strategy in which businesses set flexible prices for products or service based on current market demands. This implies that different people or groups, or people buying at different hours, are charged differently. Many industries use this. Examples are the airline industry, telecommunication industry etc. You simply have to be smart with it and justify your strategy; otherwise you can have a potential backlash from the market, which will demand use of PR to resolve. For an airline for example, someone buying the same ticket from a high cost economy is charged more. Alternatively, executives who like to fly at convenient hours might pay more than those who must get up at some odd ungodly hour to hop on a flight.
  • Consider customer elasticity when pricing. Pardon me again for marketing terminology. You see, when you are in business you need to try and expand your vocabulary so that you don’t appear so naïve when issues are being discussed. You might employ marketing and finance professionals who will be speaking in professional jargon sometimes, and you don’t need to appear dense in their midst. Simply put, customer elasticity explains how individuals or customers change their demand or amount ordered when their income or the price of the items change. Forget about the big grammar of sensitivity and a variable, which are sometimes used to explain elasticity. We are common men and not academics so we will keep it simple. An entrepreneur must know this principle about pricing, because it can assist you sell more by slightly adjusting your price, or guide you to target the market segment or client group with rising income. Come on. Aren’t these brilliant ideas we are sharing here? This blog is certainly going to be one of the best entrepreneurship blogs and resources on the net, very soon.
  • A price war is not advisable. Now, there are people on planet earth who just like fighting. May be they grew up fighting and hence think that they should also engage in entrepreneurship wars when they set up businesses. My point is this. You don’t need to fight anyhow. Fight only meaningful fights and once in a while. I mean, what are you trying to achieve with that price war? Is it driving your competitor out of the market? Then what? Monopolies are more of a dream in this modern world. Just own up to competition but play it smart. So, Mr. Entrepreneur, my candid advice is that a price war is not advisable. How can you even be sure of winning in the first place? Never underestimate your competitors, because you might start a fight and then absorb some upper cuts and get out of the ring with a bloody nose. The market is BIG and you can get your piece of the cake without drawing blood. If it gets too small for you, move on. Reinvent and re-strategize to remain a relevant enterprise. Ok?   
  • You could front a loss leader if necessary and relevant. Oh my God! Another terminology. A loss leader is a product or service you can sell at a loss with the objective of attracting more customers to your business. You will then sell more profitable goods and services to these customers or clients after they have been initially attracted by the loss leader. Now, I don’t know what your business is, and I can’t identify your loss leader for you even if you have one. Think! Decide how you want to proceed with your loss leader strategy and then be smart about it. Don’t get back yapping about bad advice you got from this blog. I’m certain that there are hundreds of pieces of good advice available on this site, so you cannot stand justified.
  • Pricing is one of the 4P’s of marketing. Have you ever heard about the 4P’s of marketing? I guess you have. These are Product (including service), Place, Price and Promotion. These 4P’s are critical to enterprises to succeed. Smart marketing guys develop their marketing strategies and tactics around these 4P’s. So, if you combine these properly, you are on your way to success in business. If you can’t get around managing the interplay amongst these variables, please ask someone to assist guide you. It is not a crime to ask. Just a disclaimer here – if you happen to be in court and you ask some silly question (assuming ignorance) you might pay a price for it. Be careful. But out of court, it is not a crime to ask. Ok?

I think we have had enough for today. These key things an entrepreneur must know about pricing are necessary for your success in business. This blog specifically also adds value to my previous two blogs I mentioned above. I advise you to read those blogs, if you haven’t. I know some people just like avoiding some things even if they are necessary and good. I desire you to be a successful entrepreneur. It’s my passion.

Bye for now,

The Wise Entrepreneur

September 4, 2017

Key Things An Entrepreneur Must Know About Pricing – Part 2

In my blog entitled What Key Things Must An Entrepreneur Know About Pricing, I wrote about various pricing methods and approaches such as cost-plus, penetration, premium, […]