7 PRICING MYTHS

Businesses owners recycle old myths about their businesses and their industry in an attempt to simplify and understand their own circumstances. But the myths will not bear much close scrutiny. Here are 7 de-constructed myths.

1. ALL my competitors buy better so they can sell cheaper; and that explains my poor sales.  

This is a trifle unlikely. Globalization of supply chains has made it simple for even small store owners to source the best. The suppliers play games, of course, with volume discounts, rebates and other sales devices to push up sales.  But, to blame the supply chain for poor sales performance is a red herring that deflects attention from other business problems.

And a final comment – Why is cheap the only measure of value you offer your customer base?

2. Business owners deem that 45% of the time, price is the most important factor influencing a sale. Customers, by their own admission, go to a competitor because prices are too high, only 25% of the time. Quality and customer service rank higher in the customer mind when deciding whether to buy a second time from you.

3. Every customer who says we are too expensive, is RIGHT.

There are customers for whom free would be too expensive. Remember too, that sticker shock can be a buyer’s strategy to get you to lower your price.  There are some customers who buy on price alone but they need to be gently pointed in the direction of a competitor.

4. If sales drop, then it is the fault of high prices.

 Really? Wouldn’t industry figures indicate a general contraction of the entire industry, particularly during a recession? If market share remains the same, then price is not to blame.

5.  Yes, but!  If you look only at a few select items, to the exclusion of others, then my prices are bad across the board.

 It is unlikely that all prices are poorly positioned. Most regular buyers of a particular product or service can recall 10 prices alone. That appears to be the maximum number of prices we can remember and  only through constant reinforcement.  So, in a store selling 1000 items, 990 things have no comparable in the mind of the buyer.

6. My costs are the only factor to determine prices.

 Prices are determined by a whole host of factors NOT related to costs. Among them are: volume discounts; 30 days to pay; free delivery; free installation; free support; and free add-ons. These factors drive up costs but are not reflected in pricing.

 7. Being the cheapest price is the only factor that influences a sale.

 This cannot be true. With items of fashion or taste, higher prices are associated with better quality or social standing. There are cheaper sneakers than the ones demanded by teenagers so that they are “cool” in their social circle. And diamond rings would not be the symbol of undying love if they cost $4.95, right?

A Pricing Strategy for Small business – why dynamic pricing works

We all know that business absolutely refuses to follow those beautifully consistent budget numbers; that revenues rise and revenues fall day by day and month by month. So, at certain times of the cycle, demand is low and at other times it’s high.

But we often set prices once and for all, ignoring these demand cycles. And what does that mean to profits and sales?

On this graph, demand, in blue, rises and falls. The price in dark red is a straight line across the time scale. Demand rises above the price line and then dips below the price line.

When demand is high, sales and profits roll in because the price is lower than would be predicted by a simple analysis of demand and supply. But, when demand dips below the price line, the company is priced out of the market.  Below the line is lost sales (RED areas) and above the line is lost profit. Why?

If demand is high and you are the lowest price, you get the business but you have given up a profit opportunity to carry you through the business cycle.

If demand is low and your price is high relative to the demand, then no one buys from you and sales go down.

This can be changed. Dynamic pricing takes into account micro changes in demand and adjusts the price accordingly. We have all seen this. Hotels charge a premium in the high summer months but offer bargains in the winter. Want to rent a moving van at month end? Pay the price! And of course, gasoline prices shoot up just before the first long weekend of the summer. Airlines used to reward the late arrivals at the airport by offering best price seating in response to an analysis that it was better to fly with a passenger in the seat at any price than flying empty. Of course, they found that this rewarded bad behaviour and have reversed the offering, charging more to the last minute traveller.

On a more sophisticated level, the Economist reported the use of dynamic pricing software being used in pubs in London to reflect demand during “happy hour” right after work, versus the early evening drinking crowd. Prices moved by the quarter hour.

Dynamic pricing also works for longer time scales. Every year in the Pacific Northwest of Canada , the lawn mowing season opens in April. Almost immediately, there is a rush to get the mower tuned up or repaired. One repair shop owner contacted his customer base in the dead of winter and offered special pricing and free storage for machines brought in immediately instead of waiting for the mowing season to begin.

Smart ideas for smart times! Dynamic pricing works.

HOW TO BUILD A CONTRACTING BUSINESS

HOW TO BUILD A CONTRACTING BUSINESS.

 “If I had cheaper prices, I would have more and happier customers.”  Most contractors   believe this statement. However, it is really an assumption not supported by research and facts.

 Do customers really leave because of high prices? Independent research suggests NO. While business owners firmly believe that 45% of customers don’t purchase a second time because of high prices, customers blamed high prices only 25% of the time.

 On the other hand, while business owners firmly believe that only 22% of customers did not return due to service problems, customers blamed poor service 75% of the time.

 And, while business owners firmly believed that only 18% of customers did not buy a second time because of quality problems, customers blamed poor quality 32% of the time.

 So what can a contractor do with this piece of evidence?   Remember that low price is often equated with CHEAP. No one wants to buy cheap but they do want value for money. And value for money according to this study is equated with GOOD SERVICE first, and GOOD QUALITY second.

Andrew Gregson has 15 years of experience as a business consultant to small and mid size businesses in Canada, the United States and the Caribbean. To date, Andrew has analyzed and assisted over 130 businesses in the service, wholesale, distribution, manufacturing and logistics sectors.

Andrew owned 3 businesses in Vancouver and dominated his market segment for 13 years. In 1997, he sold the business and went to work for a Chicago based management consultancy.

Andrew Gregson’s book “Pricing Strategies for Small Businesses” is based on the experience accumulated over many years of working with his clients in North America. Andrew is a graduate of Simon Fraser University, the University of Western Ontario and the London School of Economics.

Andrew D. Gregson B.A., M.A. M.Sc.(Econ)
http://www.pricingstrategies.ca
101-1735 Dolphin Ave.
Kelowna, BC, Canada V1Y 8A6
cell: (250) 859-0752
toll:1-888-959-0752
andrew@pricingstrategies.ca

Find the Value and find the Profit

In this market place, customers are relentless at hunting down the lowest possible price. And to be completely fair, quality and value come in a poor second if you have limited funds to spend.

But bargain hunters come in 2 flavours. First, as above, there are the customers who will drive across town to save a dollar because they need that dollar. For the rest however, they are trading dollars for quality or perceived value.

Let’s assume that you have qualified the customer for their spending budget. No point in test driving BMW’s if the budget is $2,000, right? The challenge in your small business, whether it is a retailer, contractor, service provider or distributor is to find real value and shove it into the full glare of the sun.

So, having established that the budget is $2000, you proceed to offer the items at that price point. About now your sales training should be kicking in and you have, in your mind, carefully marshaled all the features and benefits that the customer will enjoy if they buy this product

First, a terrific item with 16 wonderful features at $1999.You list each feature, its advantage and the benefits to the buyer, if he buys it. Only at the end is price mentioned.

If the buyer does not reach for his wallet, then you move down one level to the next item with 4 benefits stripped away – yes, you must mention that these features are now gone – but now costing only $1600.

And if there is no response there, you present the 3rd choice, of an item with 10 benefits removed which undoubtedly means the customer has to do more of the work personally, but now costing only $999.

In my store I sold replacement barbecue parts. They were original parts from the manufacturer (OEM) but cost more than the universal parts my competitors sold. My sales pitch was that my competitors’ parts were cheaper and required only a SMALL amount of assembly before use. The customers bought the slightly higher priced part because the benefit  received was less stress at having NOT to follow a printed instruction sheet.

The implication in this little homily is that a little bit of focused sales training combined with a harsh look at your product or service can attract bargain hunters you can sell to. If you identify the value in your product or service and communicate that with some honesty and sincerity, the cash will flow and the profit will appear.

Andrew D. Gregson B.A., M.A. M.Sc.(Econ)
http://www.pricingstrategies.ca
101-1735 Dolphin Ave.
Kelowna, BC, Canada V1Y 8A6
cell: (250) 859-0752
toll:1-888-959-0752
andrew@pricingstrategies.ca