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Top 10 pricing mistakes most companies make.

In tough economic times, evaluating product pricing is a necessity for keeping customers motivated.

Considering this strategy? Take note of the 10 most common mistakes companies make when pricing their products suggested here by Per Sjofors, managing partner at Atenga Inc., a Newport Beach, Calif., strategic-pricing consulting company.

1 Basing prices on costs, not customers' perceptions of value. Pricing based on costs invariably lead to prices that are too high or too low.

2 Basing prices on "the marketplace." Management teams must find ways to differentiate their products or services to create additional value for specific market segments.

3 Attempting to achieve the same profit margin across different product lines. For any single product, profit is optimized when the price reflects the customer's willingness to pay.

4 Failing to segment customers. The value proposition for any product or service varies in different market segments, and pricing strategy should reflect that difference.

5 Holding prices at the same level for too long, ignoring changes in costs, competitive environment and customers' preferences. Most companies fear the uproar of a price change and put it off too long. Savvy companies acclimate their customers and their sales forces to frequent price changes.

6 Incentivizing salespeople on revenue generated, rather than on profits. Volume-based sales incentives create a drain on profits when salespeople are compensated to push volume at the lowest possible price.

7 Changing prices without forecasting competitors' reactions. Smart companies know enough about their competitors to predict their reactions, and prepare for them.

8 Using insufficient resources to manage pricing practices. Cost, sales volume and price are the three basic variables that drive profit.

9 Failing to establish internal procedures to optimize prices. The hastily called "price meeting" has become a regular occurrence--a last-minute meeting to set the final price for a new product or service.

10 Spending a disproportionate amount of time serving the least profitable customers. About 80 percent of a firm's profits derive from 20 percent of its customers. Failure to identify and focus the most profitable leaves companies undefended against wily competitors.

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Title Annotation:QUICK STUDY
Author:Sjofors, Per
Publication:Financial Executive
Geographic Code:1USA
Date:May 1, 2009
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