Below some of the pricing mistakes most of the business heads do in the small, emerging organizations as I came across in my client's business.
What is meant by " Pricing"?
Pricing is a process to determine the selling price for your product or service.
Pricing is not just a mathematical calculation of adding all your costs, then add your desirables profit and arriving some numeric value as a selling price.
Pricing process even though it looks straight forward, in reality, pricing decision is more of strategic to each customer or product or services. Pricing is a combination of science and art.
If you fix a higher price and your product is commodity nature, then you will lose it to your competition.
If you fix a lower price, then you may be losing your profitability. In the long run, your business may not be sustainable to run as the cost keeps going up.
Typical mistakes in pricing process :
For example, I had seen some people fix their process cost as 10 % of their material cost. In contrast, in reality, as per the latest P&L analysis, even the average variable price is more than 10 %. The point is the lack of relying on the newest cost details, and going by the thumb rule puts the organization in making the mistake of wrong pricing.
The organization can develop the process of checking the P&L value chain every month and can have an average value of each value chain once in a quarter. That will give the business heads or cost estimation team the realistic cost structure of the organization.
except for few organizations, most of the organizations, the process of pricing is being done by the business head based on his / her way of estimating the cost and finally arriving the price. One way, he/she mentally prepares the estimation based on the experience and the judgment about the product and customer. Still, when the organization is growing, a standardized process of evaluation is required. The estimation process may be customized with the template and having the process checklist like lot size, changeover time, cycle time, the weight of the component, rejection %, and typical other costs like inventory, freight cost, etc. Once the organization standardize the process, and it can be delegated to engineers to make the first level costing, and the business head can have a final decision on the pricing
as mentioned, some business head has a thumb rule of maintaining some profitability across all product lines and customers. Pricing is always strategic, and the decision will vary from customer to customer or product lines. The Business head must think about the short term and long term implications of the pricing decisions. For example, if the organization already achieved its breakeven point, it can consider any further volume or customer with less profitability than the usual profitability margin. This additional volume or new customer will bring down the cost of operation further down, and this is beneficial only for the organization.
The pricing is the combination of science and art. The decision must be taken by the business head, considering the short term and long term implications of the pricing sensitivity to the customer.
What is meant by " Pricing"?
Pricing is a process to determine the selling price for your product or service.
Pricing is not just a mathematical calculation of adding all your costs, then add your desirables profit and arriving some numeric value as a selling price.
Pricing process even though it looks straight forward, in reality, pricing decision is more of strategic to each customer or product or services. Pricing is a combination of science and art.
If you fix a higher price and your product is commodity nature, then you will lose it to your competition.
If you fix a lower price, then you may be losing your profitability. In the long run, your business may not be sustainable to run as the cost keeps going up.
Typical mistakes in pricing process :
1. Going by thumb rule, which was fixed a long time back. Thumb rule may not be relevant today.
For example, I had seen some people fix their process cost as 10 % of their material cost. In contrast, in reality, as per the latest P&L analysis, even the average variable price is more than 10 %. The point is the lack of relying on the newest cost details, and going by the thumb rule puts the organization in making the mistake of wrong pricing.
The organization can develop the process of checking the P&L value chain every month and can have an average value of each value chain once in a quarter. That will give the business heads or cost estimation team the realistic cost structure of the organization.
2. Not standardizing the costing process :
except for few organizations, most of the organizations, the process of pricing is being done by the business head based on his / her way of estimating the cost and finally arriving the price. One way, he/she mentally prepares the estimation based on the experience and the judgment about the product and customer. Still, when the organization is growing, a standardized process of evaluation is required. The estimation process may be customized with the template and having the process checklist like lot size, changeover time, cycle time, the weight of the component, rejection %, and typical other costs like inventory, freight cost, etc. Once the organization standardize the process, and it can be delegated to engineers to make the first level costing, and the business head can have a final decision on the pricing
3. Expecting the same profitability across product lines and customers:
as mentioned, some business head has a thumb rule of maintaining some profitability across all product lines and customers. Pricing is always strategic, and the decision will vary from customer to customer or product lines. The Business head must think about the short term and long term implications of the pricing decisions. For example, if the organization already achieved its breakeven point, it can consider any further volume or customer with less profitability than the usual profitability margin. This additional volume or new customer will bring down the cost of operation further down, and this is beneficial only for the organization.
The pricing is the combination of science and art. The decision must be taken by the business head, considering the short term and long term implications of the pricing sensitivity to the customer.
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