Seven Biggest Mistakes in Setting Prices

Setting sales commissions based on sale prices vs. percentage of profit. For companies using a commission-based sales force, this is similar in scope to the margin/mark-up distinction. Commission based on the top-line vs. commission based on the bottom line directly impacts profitability. Again, profit is the only number that matters. Paying commissions out of revenue streams can mean you are literally giving away your company to your sales people.

Discounting instead of adding value. Discounting takes a toll on profits. At just a 10% discount, a typical firm would need to sell 50% more units to keep the same profit on the bottom-line. Costs also increase in the "discount" game, so companies can literally discount themselves out of business.

Instead of cutting cash out of the deal, ask yourself if there is a way you can add value to your product or service. This "value added" proposition means you can "give away" something that won't come out your profits. Done right, it can also add to the experience your customer has of both the transaction and your company. A great experience is key to getting that customer back -- which in turn is key to a highly profitable company over time.

Avoiding pricing mistakes and being strong in your pricing proposition go hand-in-hand in building a profitable business. Master the so-called "pricing paradox" and you will master an area of business in which even the most experienced entrepreneurs sometimes struggle. Once you do, you'll be confident that your products and services have value, and you'll effectively position yourself against competitors who will be too eager to "give away the store."

You won't win every pricing battle, but in the long run, your extra profits will take your company to the top.