The Biggest Pricing Mistake in Small Business

I think the biggest lost profits for small business happen when they fail to offer different products to different customer segments. In other words, the ‘product-market fit’ is poor.

Let me explain:

All your customers don’t buy for the same reasons. If you group them all together, you end up thinking the main issue is price. Every time I ask a client about their customers, the answer is usually, “it’s all about price”.

When we explore a little further we find out for some of the customers it is all about price. But for other customers, there are other different things about the business that the customers value more than price and will pay a little more for it.

The mistake is to offer the same thing to every customer.

The solution is to have a different offering for different customer groups.

Remember when there were photo labs? If you wanted your photographs developed in 1 hour it was a higher price than if you could wait 24 hours. The photo lab business was able to get a higher price from the customers who would pay for speed of service and still keep the price-sensitive customers that wanted a lower price for the 24-hour service. There is no difference in the expense to provide the service, but the price is different.

This is an example of a different product offering for a different customer segment.

An automotive tire business is a good example of at least three different product offerings: good, better and best. They have a low price tire for the price shoppers, the ‘better’ tire is usually the most popular and you have the ‘best’ tires at the highest price point.

A more recent example is the introduction of the iPhone 5c (a cheaper version) and the iPhone 5S (the high-end version). If Apple only had one phone product offering and one price, it would be very difficult to expand into markets like China, Russia and India. If they discount the price for these markets, they would be obliged to give the discount to every customer – even the ones in the customer segment who would pay a higher price.  Having two different offering for two different market segments will produce higher profits for Apple. Each product fits each market better.

The questions you want to ask about your own business are:

What are the most valued features and benefits we offer to our customers?

Can we split up our customers into groups that value specific features and are willing to pay a little more for these features?

Can we create packages or product and service offerings that deliver the specific features to the specific groups ( i.e. customer segments) for a fair price?

The challenge is to give the most valuable part of your offering to the groups that value it most.

Why give value to customer segments that don’t care about that feature?

Why give discounts to customer segments that don’t ask for one?

As a business owner, this is a concept you need to invest your time and energy in. Your investment in understanding how your value proposition is best matched to your customer segments will make you more money. Period.



Author: Paul Foster
Paul's life’s purpose is to bring more cash, freedom and happiness to independent business owners. Paul wants to learn about your toughest business challenges and frustrations so he can help you tackle them.

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