10 most common pricing mistakes & how to avoid them

How should I set my natural product prices? By marketplace value or perceived value? When should I institute a price change? Should I keep tabs on my competitors’ prices? Many pitfalls await the natural entrepreneur who fails to price her products carefully. Unless you hit that nail on the head, it’ll be slow growth or no growth for your natural products company. This list of the 10 most common mistakes business owners make when setting their prices clears up misconceptions and will help you nail down your initial prices and any necessary price changes.

Bob Burke

July 19, 2013

3 Min Read
10 most common pricing mistakes & how to avoid them

Here is a list of ten of the most common mistakes companies make when pricing their products and services:

1. Basing your prices on costs, not customers’ perceptions of value. Prices based on costs invariably lead to one of two scenarios: (1) if the price is higher than customers’ perceived value, the cost of sales goes up, sales cycles are prolonged, and profits suffer; (2) if the price is lower, sales are brisk, but companies leave money on the table, and therefore don’t maximize their profit.

2. Basing your prices on “the marketplace.” The marketplace is often cited as the “wisdom of the crowd”—i.e., the collective judgment of a product’s value. But by resorting to marketplace pricing, companies accept the commoditization of their product or service. Instead, management teams must find ways to differentiate their products or services so as to create additional value for specific market segments.

3. Attempting to achieve the same profit margin across different product lines. Some financial strategies support a drive for uniformity, and companies try to achieve identical profit margins for disparate product lines. The iron law of pricing is that different customers assign different values to identical products. For any single product, profit is optimized when the price reflects the customer’s willingness to pay.

4. Failing to segment your customers. Customer segments are differentiated by the customers’ different requirements for your product. The value proposition for any product or service varies in different market segments, and price strategy must reflect that difference. Your price strategy should include options that tailor your product, packaging, delivery options, marketing message and your pricing structure to particular customer segments in order to capture the additional value created for these segments.

5. Holding prices at the same level for too long, and ignoring changes in costs, competitive environment and customer preferences. Most companies fear the uproar of a price change and put it off as long as possible. Savvy companies accustom their customers and their sales forces to frequent price changes. The process of keeping customers informed of price changes can, in reality, be a component of good customer service.

6. Changing prices without forecasting competitors’ reactions. Any change in your prices will trigger a reaction by your competitors. Smart companies know enough about their competitors to predict their reactions, and get ready for them. This avoids costly price wars that can destroy an entire industry’s profitability.

7. Incentivizing your 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. This mistake is especially costly when salespeople have the authority to negotiate discounts. Companies should define their sales staff’s job as maximizing profitability and then work to incentivize that profitability.

8. Using insufficient resources to manage your pricing practices. Cost, sales volume and price are the three basic variables that drive profit. Most management teams are comfortable working on cost reduction initiatives, and they have some level of confidence in growing their sales volume. Many companies, however, only utilize simplistic price procedures.

9. Failing to establish internal procedures to optimize prices. In some companies, a hastily-scheduled “price meeting”—a last-minute discussion to set the final price for a new product or service—can become a regular occurrence. The attendees are unprepared and research is limited to a few anecdotes about a competitor’s price list and a financial officer’s careful calculation of the product’s cost structure across a variety of assumptions.

10. Spending a disproportionate amount of time serving your least profitable customers. Know your customers: 80% of a company’s profits generally come from 20% of its customers. Failure to identify and focus on these 20% will leave companies undefended against wily competitors. Such failure also deprives the company of the loyalty that more attention and better service would provide. 


This content is excerpted from the Natural Products Field Manual, Sixth Edition, The Sales Manager’s Handbook, written by Bob Burke and Rich McKelvey. To learn more about or purchase the Natural Products Field Manual, visit the Natural Products Consulting Institute website.


About the Author(s)

Bob Burke

As a consultant since 1998, Bob Burke provides assistance in bringing natural, organic and specialty products to market across most classes of trade. This includes work in strategic planning, growth strategies, writing sales, marketing and business plans, budgeting, pricing, building distribution, broker selection and management, organizational development, strategic options, financing, branding, trade spending management and assistance around M&A, due diligence and venture strategy groups. He is also the co-author and co-publisher of the Natural Products Field Manual, Sixth Edition, The Sales Manager’s Handbook and Staking Out Space on the Supermarket Shelf. Prior to consulting, Bob was with Stonyfield Farm Yogurt for 11 years as Vice President, Sales & Corporate Development and Vice President, Marketing & Sales. He has held marketing positions with Colombo, Inc. and Sperry Top-Sider. He received an MBA from Babson College.

Bob has worked with numerous companies, including Annie’s Homegrown, Oregon Chai, Snyder’s of Hanover, UNFI, No Pudge!, Kraft Foods, Bayer Consumer Care Division, ConAgra, Kellogg’s, General Mills, Stacy’s Pita Chips, Kettle Cuisine, Small Planet Foods, New Hope Natural Media, Bushes Beans, Equal Exchange, Nantucket Offshore/Stirrings, Immaculate Baking, Dr. Bronner’s Magic Soaps, Dancing Deer Bakery, The Natural Dentist, Rice Select, EcoFish, PMO Wildwood, S.C. Johnson, Blake’s All Natural Foods, Megafood/BioSan, Mighty Leaf Tea, Lesser Evil Snack Co., Theo Chocolate, The Jane Goodall Institute, Kashi, Project 7, Vermont Butter and Cheese, Yoghund, Bord Bia, American Halal, Orgain, Turtle Island, the W.K. Kellogg Foundation, Bausch + Lomb, Boehringer Ingleheim, Harbar LLC, Rhino Foods, Popcorn Indiana, Stonehouse 27, The ProBar, Hail Merry, Mamma Chia, 479 Popcorn, Heel USA, Nature’s Path, Pfizer, Cape Cod Provisions, E&A Industries, Sopexa USA, Mavea LLC, Via Sana, Skyland Foods, Ignite Sales, Dave’s Gourmet and others.

Subscribe and receive the latest updates on trends, data, events and more.
Join 57,000+ members of the natural products community.

You May Also Like