In the 1970’s, a Swedish manufacturer of mining equipment, sold worldwide, could not supply a much needed rubber grommet for its hard rock drills. When the situation became desperate, one resourceful area manager went off in search of an adequate replacement, in order to keep the customers’ drills working. After a few enquiries, the area manager was directed to a rubber component manufacturer in Vancouver. When he produced a much worn example of the grommet and asked if they could make this for him, he was astounded to be told that they had, in fact, made the original he had in his hand. He was even more astonished to learn that the over-the-counter retail price to him was less than 10% of the price he would normally have paid the mother company. Based on cost to manufacture, this small item warranted a low price. But in a drilling equipment application the replacement grommet was costly simply because it was a microscopic portion of the total machine price and an even tinier percentage of the dollars per hour lost when the grommet failed and the machine stopped producing. Therefore, the price reflected not a cost to make, but need in that market segment.

A common mistake made by business owners is to assume that their purpose is to set a price for a product rather than for the customer segment. Identical products or services can be sold at many different price and profit levels.

In a current example (2012), the price of rare earth metals has risen as China restricts exports. Niobium is essential in every cell phone on the planet but the sharp rise in price has not had any impact on the price of cell phones. This is because only a ¼ of one cent’s worth of niobium is used in each phone. Sellers of niobium, whose customers manufacture cell phones, have vastly increased prices and profits but the price of cell phones has not risen.

Purchasers can and do evaluate your product or service in terms of reputation, durability, reliability, after-market service, freight costs, installation, inconvenience, and payment terms. Your business and your sales offering, need to address important factors like these, in a way that means something to the customer.  Otherwise price becomes the sole, only and determining factor that makes a customer buy from you instead of the competition.

The following three steps, with accompanying examples, illustrate how to do MISSION IMPOSSIBLE. Every businessman’s dilemma can be overcome using innovative solutions and will result in increased sales, increased profits and more customers.

Analyze your customer and press the hot button

In 1954, DuPont introduced a new polyethylene resin used in pipe manufacture. Until that time, all polyethylene pipes had been made from a by-product of off-grade resin.  While the new pipe   looked exactly like pipe made from off-grade resin, it had a longer life than competitive pipe material and could withstand greater pressure.

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Bambi meets Godzilla – Seven Ways to Avoid being Crushed in Today’s Tough Markets

For many retailers these days, opening the doors each morning is a replay of the classic 1969 two minute cartoon “Bambi meets Godzilla” as created Marv Newland. Bambi is the oblivious small business owner who is just trying to make a living and pay his bills. Godzilla is, at one and the same time, the giant retail store across town and the cold hearted customer who would rip all the flesh off Bambi’s bones.

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Price, choice and buyer psychology: how understanding these factors can increase your sales.

Price, choice and buyer psychology: how understanding these factors can increase your sales.

In a Ted talk (http://www.ted.com/) a few years ago (http://www.ted.com/talks/lang/eng/malcolm_gladwell_on_spaghetti_sauce.html), Tipping Point author Malcolm Gladwell spoke about the role of choice in buying decisions. When discussing pasta sauce, the manufacturer wanted originally to know what the customer wanted. From that information they would craft a product to fit customer taste. Was the customer demanding chunky, spicy or smooth pasta sauce? Market research came back with a carefully crafted statistical analysis showing that most people wanted smooth. Gladwell disagreed with the conclusion.

By offering only smooth pasta sauce, they would have missed market niches looking for chunky and spicy with a consequent loss of market share in pasta sauces. So the statistical answer was correct but insufficient for a business decision.

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How to avoid being just another commodity

How to avoid being just another commodity – reprinted from the Financial Post Paul Hunt Mar 22, 2012

Marketing professionals work hard to bring innovative new products to market, but often the customers’ procurement department figures out ways to commoditize the product thus negating the pricing power that you expect to get out of an innovation.

The result is poor profit margins and less investment in innovation — not an acceptable formula for long term success.

This trend is prompting some marketers to find ways to make sure they capture a price that rewards the value they have created.

Here are a few examples.

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just fizzy white wine at a price

A business owner must see his business as a daily battle to create differences between his bakery and Billy’s bakery across the street. A victory in this battle means that customers will pay your price for quality, convenience or selection. Defeat means that your customers will reduce everything to the simplest comparable state – apples to apples, loaves to loaves – and dollars per unit. This is how customers will make a buying decision, by boiling choices down to the simplest common denominator- a situation what will certainly occur if you do not strive to offer value and which will result in you dropping your prices to compete.

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Assigning a price to a product is always tricky. But what if the product is illegal and the value subjective? Setting Allison Schrager discusses the matter with a happily self-employed prostitute. “I’ve always wanted my own business,” says Andrea …

Andrea, an attractive, petite red-head, with a warm smile and a degree from a top Canadian university, sits across from me, sipping an herbal tea. She has been working as an independent, high-end prostitute for the last four months.

I ask her how she decided to set her fee, now at $500 per hour.

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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.

Keep Your Price and Keep Customers

Keep Your Price and Keep Customers

Where is price in the hierarchy of retaining customers? This is 2010 and we have high customer churn rates and the market is not growing for most products and services. We know that getting each new customer costs a ton of money. We know that losing a customer hurts.

Unfortunately, the default mechanism of most businesses is to drop prices and have sales. Now, having a sale is a good thing just because it creates customer awareness. But, is a lower price the key determining factor in where a customer opens his wallet?

I am going to reveal 4 facts on customer loyalty summarized from a study called the Loyalty Connection. The author suggests that the reasons customers are believed to defect is wildly different depending upon which side of the service desk you stand.

In his analysis, 74% of the time the customers themselves say they do not come back because of customer service problems. Business owners, on the other hand, rate customer service much lower as the reason that customers do to return at a mere 22% of the time. “Most people leave a company because they feel they’re not treated well,” according to Arthur Hughes, author of The Customer Loyalty Solution. “They feel that, for some reason, they have been ignored or not treated properly. Typically they feel that they’ve been neglected or somehow abused.”

Quality is seen by customers as an issue fully 32% of the time while business managers rank quality as the suspect only 18% of the time.

Most strikingly, the price was ranked by owners as the number one reason customers defected more than 45% of the time. Customers reported that price was the factor only 25% of the time.

An intriguing indicator is that “needs changed” drove 35% of customers away while business owners saw that as being relevant only 8% of the time. Perhaps the business is out of touch with its own customer base?

What conclusions can business managers draw from these snippets of fact? It appears that staff indifference is a greater cause of losing customers than price. So, training your staff and sales people should be your number one priority.
Secondly, if you have been driving down quality – of service or the goods you inventory -to achieve a price point, perhaps that target needs a second look? There is a market – every day of the year- for the cheapest product. Just witness the spectacular success of the dollar stores. But if there is any expectation of a quality product or service, price is gently shouldered to the sideline.
What can you say about “needs changed” as the reason that customers do not return? We have been exhorted for decades to learn more about our customers and their needs. In the past few years, the technology to gather the data and act upon it has become readily available. Consider the example of Cablecom, a Swiss telecom company. They reduced customer defections from 20% per year to just 5% by crunching the data they had collected. They found that the decision to leave was made 3 or 4 months before the expiry of the contract as indicated by the sudden rise in the number of customer service and support calls. So, the company offered certain customers special deals seven months into their contract and reaped the benefits.

Contact Andrew for your next meeting:
Andrew D. Gregson B.A., M.A. M.Sc.(Econ)
101-1735 Dolphin Ave.
Kelowna, BC, Canada V1Y 8A6
cell: (250) 859-0752

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.

Bambi meets Godzilla – Getting Your Price in Today’s Tough Markets

For many retailers these days, opening the doors each morning is a replay of Bambi meets Godzilla. Bambi is the oblivious small business owner who is just trying to make a living and pay his bills. Godzilla is, at one and the same time, the giant retail store across town and the cold hearted customer who would rip all the flesh off Bambi’s bones.

Survival in this jungle depends upon being smarter in how a retailer runs his day to day business. Among the most important is staff training. I don’t mean the kind of staff training focused on smiley faces, using the cash register, being nice to customers, or even upon product training, although all have their place. Rather, retailers would benefit most by focusing staff training on presenting prices.

“How much?” is every customer’s question. How the salesperson answers that question will determine whether the customer slaps down his visa card or not.

We are, of course, speaking here about sales techniques. People with poor sales skills sell on price alone. The only response they have to the question, ”Why should I buy from your company?” is, well, price. The solution, of course, is good and well trained sales people who find a way to conjure up a short and vivid picture of value in their client’s brain before talking about price.

So what should the sales training look like?

First, train the staff to deal with sticker shock. Sticker shock can just be an act to get you to reduce the price. Remember that a shocked response to the price is sometimes merely a buyer’s strategy.

Years ago, an employee of mine responded to customers asking “What’s MY discount?” by stating loudly that the $15.95 hat in his hand was $1500 dollars but that today, with his discount, it was a mere $15.95 – the original sticker price. The customer laughed and bought the hat.

Sometimes sticker shock reflects ignorance of the market conditions. If your competitor is within a few pennies of your pricing, your customer will appreciate knowing that you are competitive. Tell him! “My competitor has a similar replacement part – but not from the manufacturer – that is $1.50 cheaper and is universal so it only requires a little bit of assembly.” The inborn analyst in most customers is weighing cost and benefit.

But, the best sales technique is to get value on the table first. Build a detailed picture of the value that is offered by your product or service. Once the value side of the ledger is built up in the mind of the customer then the price on the other side of the ledger seems less important. Keeping the price means keeping profit margins.

Many years ago I was present at a sales training meeting in Vancouver put on by the 300 pound Maytag salesman. He explained in great depth why the “heavy duty” machines were worth the extra money, how special the springs were and bored us with the technical details until all our eyes were beginning to roll back into our heads. As he continued the explanation, he brought a tiny stepladder to the side of the washing machine. This huge man casually stepped up the stairs and into the machine through its open lid. “This is heavy duty”, he announced standing inside the washing machine with outspread arms and a gigantic smile on his face. That image has never left my memory.

Next, get your customer to open first; telling you what price they thought they would be paying. Most retailers will have a range of prices for similar goods that coincide with features and extras. No point on wasting time trying to sell a $30,000 boat to a man with a dinghy budget! Get him to the dingy aisle as soon as possible.

Next, sandwich your price between the benefits you have already listed. This heavy duty washing machine with super thick springs will save you water and time by handling those really big loads. And at $799, it is a real bargain because of the 2 year warranty on parts and labour.

Finally, try to create a pyramid of cost penalties for not buying. This is a one day sale. This is the last of our inventory until July. The next models from the manufacturer have a shorter warranty and are not available in this colour.

My final word on staff price training is to drive home that price is an indicator of value by itself. Low price signals a CHEAP product. Would diamond rings be THE symbol of undying love and commitment if they were priced at $4.95?

Contact Andrew for your next meeting:
Andrew D. Gregson B.A., M.A. M.Sc.(Econ)
101-1735 Dolphin Ave.
Kelowna, BC, Canada V1Y 8A6
cell: (250) 859-0752
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.