Most businesses confuse price with pricing.
Price is just the number you slap on the tag. Pricing is the process that gets you to the right number, the one that optimises today’s profit while building tomorrow’s success.
Unfortunately, most businesses treat pricing as an inclusive way to do cost-plus calculations. The finance team sets a target margin, the sales team references the market leader, and the final number is more wishful thinking than strategy.
That is not pricing. That is strategic abdication.
Real pricing is deliberate. Strategic. Ruthlessly focused on outcomes.
You see strategic pricing in odd places.
That wine list at your favourite restaurant with the most expensive bottle first on the list. It is not an accident, done alphabetically, or random. That $500 wine is not there to sell, although occasionally it might. It is there to make the $70 bottle that costs $30 in the grog shop next door, look like a bargain.
Rolls-Royce does not put their cars into motor shows anymore. Why park next to a $30k Toyota and look ridiculously expensive when you can park next to a $10 million jet and look like a ‘pocket change’ purchase by comparison.
It’s called context, and it matters. Dan Ariely nailed this in a classic experiment using subscription costs to the Economist, and his MIT graduate students as the research fodder.
First version:
- Web only: $59
- Print only: $125.
- Web + Print: $125
Result? Almost everyone picked the combo. The web + print option made it look like they were getting a version for free.
Second version:
- Web only: $59
- Web + Print: $125
This time, far fewer picked the combo. Why? No dummy option to anchor the deal.
That’s the decoy effect in action. It works because humans do not make rational decisions. We make comparative ones. Smart pricing taps into that.
Great pricing is not about squeezing the lemon. It is about understanding your customer, your position, and your objective.
Most small businesses leave money on the table by setting their prices too low, hoping never to lose a sale. However, you need to lose a lot of sales to make up for the positive bottom line impact of even a very small increase in the average price.
Want to prove that to yourself?
Track the impact of a 1% price increase through your P&L. Assuming you are using actual costs instead of some sort of confected percentage calculations, the whole amount of the increase will drop to the bottom line as increased profit.
You will never just slap a price on a label again.
