Most companies are unaware or do not give their pricing strategy the vast importance it deserves. They fail to see that by not having the right strategy to set their prices, they are losing profitability, which in turn detracts from their cash flow and progressively lose their impact on the market.
Let’s take as an example the case study of GoPro and its creator Nick Woodman. We will analyze what were their beliefs or myths that affected their profits in such little time - 5 years!
The issue at hand is that when a company starts to do very well in sales, the worst mistake it can make is not setting their target price correctly.
Hence here’s the importance of utility over pricing.
It should be emphasized that these myths constantly affect the profitability of many companies, and the core reason of this flaw is a lack of deep understanding of the product we sell.
To better understand these myths, it is necessary to highlight how utility is shaped:
Here we can observe the four variables that move a company. The first two (F and V) are variables of little margin of mobility since the costs, both fixed and variable, are very optimized. The volume (Q) depends on many factors such as the market, government decisions or industry dynamics, so it is not very controllable.
The price(P), however, is something that we do not have optimized and therefore, we can handle it in our favor.
Costs are the basis of the price.
Are you one of those who set the price based on the cost of the product?
Pricing is more than a number. We must set the price from a point of view beyond its cost, we must do it from a perception.
What is the perception of value that my customers have about this product? It is a function of the answer that I must set the prices of my product.
We are used to the product generating a cost, the cost driving its price, and assume that is the value that customers give. But it is totally the other way around: we have to see how much a client is willing to pay, what is the value they give the product and depending on the value they perceive, we give a price; and with that price we’ll see if it justifies the costs of our product. What will that pricing do is to capture the highest market value of the price and make it much more profitable.
It is important to note the 3 C's of pricing by value:
- Create value
- Communicate value
- Capture value
"In the future, it will be possible to predict a person's behavior and experience from their brain activity." John Dylan Haynes
It is more important, to some extent, to dig deep on how we transmit the value of our products to our customers than the value it has, and it is all a matter of perception.
Our perception of value changes based on our emotions. When we acquire a product, we do it in an emotional way and not so much rational.
The value of our product lies in how we communicate it so that the customer perceives it and convince them that they need it. That's one of the ways we can set a price.
A shirt of a recognized brand can cost $ 19 Dlls, but if the most valuable player of the team signs it, it could cost up to 45 times more!
To put it simply, price is something beyond mathematics and costs.
The price is a perception of value and people make the purchase decision if they consider that what they receive is worth more than what they pay, so our job is to raise this perception of its value.