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 the 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.

By offering only smooth pasta sauce, however, 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.

When you look at coffee sales, you get the same results. In focus groups some people will tell you that they like bold coffee with lots of body. Others like lighter roasts and yet others like it milky. But an homogenised market survey will show that statistically most people drink weak, milky coffee. Again, making a coffee for the mainstream market means foregoing some market share. Taking the statistically significant middle ground means that portions of the market on either side of the middle are not served by your product or service.

But too much choice is a sales killer. People like choice but not too much choice. They want an economical option, a middle of the road offering and a quality choice. They don’t want 57 choices because it is just too much information to have to absorb, digest and thereafter make a decision. Three or four and never more than 5 choices reflects the optimal options in a buying decision.

Too much choice, as a study of dating sites revealed (Economist: Modern Matchmakers; http://www.economist.com/node/21547217) leads to confusion with no transaction at all or where the potential “customers” boiled down everything to the lowest common denominator. On dating sites, and in speed-dating, the lowest denominator became physical attributes. In the business world that would be price.

Sometime in the late Jurassic, I worked for the largest appliance distributor in Western Canada. Although not directly involved in the sales operation, I went along to a sales meeting in preparation for a huge week long sale being mounted in Vancouver. The sales manager Derek, advised the sales staff that, of the 3 models, model A was the one with all the bells and whistles and sold for the most money. But there was limited inventory, so don’t focus on selling this one. The middle version was the one with the most inventory and best gross margin. This is where the effort should be focused. The 3^rd model was the cheap and cheerful model being heavily advertised. The sales manager advised them that if they sold a cheap and cheerful model, he would fire them. Although now discredited as bait and switch selling, the example is of

Can you use this strategy in your business? Are you offering an homogenised product at an homogenised price? Are you leaving money on the table from customers who would like the best option and are prepared to pay for it? Are you missing out on sales of an economical product or service that could increase your brand recognition, walk-in traffic and overall revenue?

Can you offer a good better best option?

Think of your struggles against the big box stores and their purchases of overseas products. The box stores sell on price alone and can beat you on price every day of the week. But they do not typically offer anything more than the cheapest available. But you can. On any given day, I might need a hammer. So, I go to your store and you have the cheap and cheerful hammer made in China hammer selling for $9.99. Right next to it you have a made in Canada model selling for $19.99. Today I have $15.00 in my pocket, so I buy the offshore product.  I am not a contractor and use a hammer 4 times a year, so I don’t need the best, just something that will frighten the neighbours.

In the final analysis you cannot know your customer’s purchasing power without asking for their budget. You cannot know if the customer is a contractor or a weekend warrior, unless you ask lots of questions. In the absence of good information, offering a choice of products in a tier of prices is the best way to capture all the market niches and build your business.

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.

1. Pay per Use

Pay per use is common for services and subscription based products. In recent years, it has been introduced as a new pricing model for hard goods.

• A      manufacturer of aircraft components developed a tire that would last      longer than anything else on the market. Despite being a premium product,      customers had a difficult time accepting the premium price. The      manufacturer regrouped and set the pricing strategy based on the key      benefit: increased number of landings. Instead of buying a set of tires,      customers would pay for each landing they achieved with the new tires. The      lower per-use price appealed to customers and generated higher revenues      than the manufacturer forecasted with its original pricing strategy.

• In      healthcare, large capital investments for equipment are necessary but      difficult with tight budgets. A medical device manufacturer developed a      new delivery system for anesthesia and introduced a pay-per-procedure      model. Hospitals would essentially “rent” the equipment and pay for each      time the device was used. The pricing model was a huge shift in thinking      for the healthcare industry but made it easier to adopt this device      because they didn’t have to budget for a large capital expenditure.

Pay Per Use is an effective strategy when the customer doesn’t want to make a large capital investment and the manufacturer can generate recurring revenue from frequent product use.

2. Pricing based on Cost-Benefit Analysis

Cost-Benefit analysis is a regular exercise for procurement departments evaluating between product offers. It can also be an effective exercise for a Pricing Manager to do when setting prices.

• A      medical equipment manufacturer developed a new line of hospital beds.      Based on specifications, these beds did not appear to be different than      existing beds but they were twice the price. The manufacturer knew its new      line of beds had advantages over the competition so it invested in a      cost-benefit analysis. With the results, the manufacturer was able to show      that its beds reduced workplace injuries, therefore reducing time off and      worker compensation costs. The savings made up for the premium price of      the bed and sales took off.

Proving to your customers the long term savings that can be achieved with an investment up front can drive success.

3. Pay What You Want

This strategy has gotten a lot of press, but the results have been fairly dismal…..except in a few very unique situations. Instead of the marketing team selling the value of the product and setting the price, the customer determines the value and pays accordingly.

• The band      Radiohead released its last album as a digital download and listed the      price as “up to you”. The strategy generated publicity and interest in the      album. However, Rolling Stone reported that while the album was popular, most fans      decided Free was the best price for the digital download.
• Even      organizations and individuals that are reliant on Pay What you Want have      made some modifications to try and increase what they receive. Two      examples:
• I was       at a “Busker” fest (e.g. street performers) recently. It was very       interesting watching them implement their pricing strategies…..after they       finished their act they pointed out what made them unique and the value       that they brought “where else can you get to see world class       entertainment like this and not have to pay a substantial price. I am       only asking you for a minimum donation of $5! I used to give $1 and feel       good about it…..not any longer! In speaking to a few of the buskers they       have found that the donation size has gone up….more than enough to offset       any loss in the number of donations!…..

“Pay What You Want” is necessary in some situations (e.g. not-for-profit, busking, etc.) but even they are setting reference prices to push their constituents to “dig a little deeper”. And when it comes to consumer goods, “Pay What You Want” will bring out the spendthrift in all of us.

Be sure you are not letting yourself be commoditized. Remember, when it comes to pricing it is just as important to have the right pricing model as it is to have the right price.

Paul Hunt is the president of Pricing Solutions, an international pricing strategy consultancy dedicated to helping clients achieve World Class Pricing competency. Written in partnership with Madeline Stein, Senior Consultant of Pricing Solutions.

Andrew Gregson has 20 years’ experience as a business consultant to small businesses in Canada, the United States and the Caribbean. Andrew started his business career in 1981. Andrew has analyzed and assisted over 120 businesses in the service, wholesale, distribution, manufacturing and logistics sectors in Canada, The Caribbean and the United States. In 2011 CBC National Radio interviewed him for his views on dynamic pricing and subsequently he has lectured to business groups, colleges and universities from coast to coast.

Andrew is available for lectures, workshops and consulting engagements.

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.

Commodities like flour, pork bellies and water are traded on the world market on price alone. A successful business should be striving on the other hand to steer away from stark YES or NO decision and present itself as that highly desirable, nutritious, refreshing, sexy and distinctive water that will have the neighbours “oohing” and “aahing”. That is how you get your price.

In some instances, price is an indication of quality. Selling cheap means a substandard product in some customer’s eyes. Don’t sell me clothes. Make me attractive, stylish and self-confident!

Consider champagne, which is only fizzy white wine after all, but with typically higher prices. But the makers have kept improving sales in a market for alcohol that is uniformly declining across the developed world by positioning champagne as the special occasion drink. Could you imagine celebrating your 10th wedding anniversary with a bottle of Pepsi? I can imagine the divorce lawyers having a giggle over that one.

In the 1970’s when Ford was having huge quality problems in its Lincoln models, the company brass instructed the sales people to phone and ask customers about the performance of their new cars. This created a torrent of warranty claims from all dealerships across the country – except for one. At that dealership the sales staff did not ask if there was anything wrong with their purchase – implying something negative. Rather, they tapped into the reason that people bought a flashy expensive car in the first place. They phoned to ask how the neighbours liked the new car. This time the response was totally upbeat.

If your business wants to be successful, then don’t marry the ugly sister by putting price on the table before you have offered value. In your store or sales presentation, value should be offered first and price last. You alone can prevent the customer from taking the easy route and making a comparison on price alone. If you introduce price in the first breath, you have just told the customer that their choice must be on price alone and your efforts to add value after that are wasted

So where is the value? What makes your product especially good and a benefit to all who buy it? Is it healthful? Will it save time and money? Is it the best fit and best looking blouse on the racks today?

If you are selling something wherein everyone knows the price, like crude copper, say; what is the value proposition in dealing with your company? Is it the payment terms? Free delivery? Just in Time delivery? The sexiest sales staff? Do you have acres of parking? What value is buried in the price that you can bring into the sunshine for your customers to say “ooh” and “aah”?

Nevertheless, if you truly believe that your business can only compete on price, consider this. There is a product made from two commodities – water and flour – which are sold worldwide on price alone. In turn, this mixture should be the perfect commodity product. Right?

But, this dried paste of flour and water has over one thousand different market niches. And it has created all these niches and price points not by changing the use of this food product or even its flavour. The Italians have altered only one variable for this product – the shape of the food!!?? It’s brilliant! It’s pasta.

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 …
Special to MORE INTELLIGENT LIFE
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.
How does a supplier determine a price?
Like most independent escorts in the New York metropolitan area, Andrea advertises on the Eros guide, an online listing service. She is in the VIP section, which Eros describes as, “A very special limited list of entertainers”. To be listed as an Eros VIP, Andrea shells out about $200 more per month, on top of the regular monthly fee of $175. (The cost of being listed varies in each city, and VIP add-ons can cost more.) This is her way of signalling that she is a high-end product, offering better quality service.
The going rate for VIP escorts on Eros ranges from $400 to $2,000 per hour, be they women, men or “she-males”. A search through the female listings yields an array of escorts who all claim to be well educated and worldly, and appear exceptionally attractive. An escort’s fee is determined by the provider or agency; Eros is merely a clearinghouse.
“I only charged $300 when I lived in San Francisco,” Andrea says. Unlike most industries, escorts can charge higher prices when they are in greater supply. This is because price is one of the few metrics sex suppliers can use to convey quality. (In this way it is not unlike the hedge-fund industry.) There are only about 30 VIPs in San Francisco, but nearly 100 in New York, so Andrea can charge more here. The customer demographic is also wealthier, and a higher price deters customers from bargaining, which is considered poor taste.
In any non-competitive industry, setting a price is a supplier’s way of communicating value to a customer. When information is imperfect or asymmetrical (ie, when customers don’t know enough about a product, or when suppliers are ignorant of their value relative to their competition), prices deviate from their market value and the market becomes riddled with inefficiency. This is why tourists in midtown Manhattan spend too much money on fake antiques, and why my local laundromat will wash and dry my clothing for half the price of rival cleaners across the street.
For a prostitute, the asymmetry is more profound. On the supply side, it is challenging for Andrea to price herself relative to her competition. Despite the publicly available listings of prices, photos and expertise of fellow escorts on Eros, it is impossible to know if these other women provide comparable services. On the demand side customers cannot be certain that the product resembles the advertising. And much of the value is merely hinted at, owing to the illegality of prostitution.
The credit crunch means customers have become more price-sensitive. Andrea now receives more requests for an hour of her time instead of two. One woman on Eros is currently offering “Wall Street adjusted courtesy rates”. But given the role price plays in indicating quality, rates will probably remain sticky.

“I could do lots of other jobs, but this what I want to be doing”
Andrea first considered the industry after watching the 1967 film “Belle de jour” with her then husband some years ago. (She is now divorced.) She found herself inspired by Catherine Deneuve’s character–a married woman who worked as a prostitute by day–and saw this as a life she might like to lead. Upon exploring her own sexuality, she discovered she had a special gift: “I can be turned on internally,” she explains. “I don’t need that hot guy in front of me, it comes from within.”
Employed as a personal assistant, Andrea began looking for more interesting work. She was intrigued by an advertisement on craigslist for “Very personal assistants.” The job, she discovered, entailed a mix of secretarial work and the odd sexual act. For her first time, she let the man set the price: $200. They proceeded to have what Andrea describes as an “amazing” sexual encounter. Afterward she realised that she could ditch the secretarial work and make more money “just doing the fun stuff.”
She tentatively began advertising herself on Eros, and set her fee at $300 an hour. (Friends in the industry recommended the site.) This price was higher than what women charged in the craigslist classifieds (considered the dregs of the industry), yet lower than the going rate on Eros. New to the industry, she felt she was not yet worth a higher rate. She raised her price upon moving to New York last autumn.
In outlining her value, Andrea boasts that she does not merely provide sex, but also a vital service. She prides herself on being in tune with the desires of her clients, and maintains that she enjoys the experience. For her single male customers, she provides needed intimacy. For married ones, she says filling an “emptiness” in their lives can enhance their relationships with their partners.
“I love what I do,” Andrea tells me. “Many of the girls hate it, but I love it. I could do lots of other jobs, but this what I want to be doing.” Andrea concedes that she’s still new to the field, but her pleasure seems genuine.

Learning the tricks of the trade
Selecting an escort is tricky, given the limited information, daunting range of prices and questionable legality of the enterprise. There are services to aid consumers, such as the Erotic Review, a popular website that offers thorough reviews of the physical and sexual characteristics of escorts (on a scale of one to ten). The VIP section reads like the Penthouse forum (VIP distinction is quite pervasive in the industry).
Yet this information can also be unreliable. David Elms, the original owner of the Erotic Review, was accused of accepting bribes in exchange for posting positive reviews. Yet even when reviews are posted in good faith, experiences with a single escort may vary according to the circumstances. The variability in dollar value for a single escort’s service is a phenomenon known as YMMV (Your Mileage May Vary).

Favourable reviews let escorts charge higher fees, but also increase the risk of alerting law enforcement officials. This is because the site makes plain what Eros leaves to euphemism (“escort services” can mean many things.) Andrea has taken several measures to evade legal action. Customers must contact her through her website and provide a real name and phone number. The number must be a main line at a verifiable company, not a personal extension. Self-employed clients need a reference from another escort. Neophytes must seek services elsewhere first.
As many as 100 visitors come to her website each day, Andrea proudly discloses. (Activity on the site certainly peaks on Fridays at 1pm.) Her site features many alluring photographs, and she wears some clothing in all of them. Nudity signals low quality.
Andrea learned some tricks of the trade from other women in the industry. Independent providers have a loose sorority, even though they compete with one another. Escorts maintain a website called the National Deadbeat Registry, which features advice such as: “Stay emotionally healthy by being emotionally detached.” Also: “Many clients have issues with women, and therefore do not, or can not, have normal healthy relationships with women. That is why they pay for your time and services. Keep this in mind and remember to not ever get involved, date, or marry your customers.” (So much for nursing “Pretty Woman” fantasies.)
The Deadbeat Registry also names and shames errant hobbyists (men who patronise prostitutes), be they undercover police, insolvent or violent, and highlights those who fail to show up for appointments (a common problem). Andrea tells me about a hobbyist who always paid with a credit card and later disputed the purchase. He did this to several women; once they learned of their shared foe, they banded together and informed their client’s boss of what was being done on company time with a corporate card.
“I consider myself an entrepreneur”
Without the support of an agency, Andrea must manage some tedious aspects of the business, such as operating her own website and covering the costs of advertising, health care, photos for her website and personal grooming.
Working independently is less stable, as agencies tend to provide a more steady stream of clients. But Andrea considers working for an employer degrading, and is uncomfortable with someone else setting a price for her services and profiting off of her body (agencies often take a 50% cut). She prefers choosing her own clients and deciding on what she is willing to do with them. “I am solely responsible for my own mistakes and successes,” she says. Having and respecting boundaries is important.
“I’ve always wanted my own business,” she explains. “I consider myself an entrepreneur.”
Agencies often charge higher fees because they claim to offer customers greater accountability. They are seen as more customer friendly and enjoy the advantages of economies of scale, making the costs of screening clients and marketing escorts lower than those for independent providers. Yet Andrea reckons working for an agency has become more dangerous, as law-enforcement officials are more inclined to crack down on larger networks to expose more customers. At any rate, internet listings have enabled more independent providers in recent years
Slouching towards economic equillibrium
In cases of extreme uncertainty on the part of consumers, such as when shopping for a used car, the convention is to expect a “market for lemons”. Used-car salesmen are widely seen as a sleazy bunch owing to incentives they have to lie about a car’s quality. Because buyers presume a good chance of fibbing, most will only pay a low price for a used car. This could deter honest brokers, and ensure that only lemons are indeed on the market. Honest salesmen of quality cars can break this cycle and charge more, but only after building a reputation for good value.
Similarly, some assume that the only kind of women who would sell themselves at any price are of poor quality–ie, lemons. Especially valuable escorts who are exceptionally attractive, appealing and skilled, say (ie, in short supply), can break this perception of low value by charging exorbitant prices. (The high prices are also a factor of the illicit nature of the product.) Fees can reach astronomical heights as a supplier builds a reputation. In this way high-end prostitutes can escape the “market for lemons” perception.
Self-employed service providers always struggle to determine what the market will pay for their work. The aspiration is always to find the price that enables economic equillibrium, where supply equals demand. But when the product is sex (human capital in the purest sense) the problem becomes more personal and the information more scarce. The escort industry has developed unique ways to signal value and to overcome information asymmetries. Time and experience should help Andrea to approach her own personal equilibrium price.
(Allison Schrager is an economist based in New York. She keeps a website with links to past articles.)

Andrew

Online dynamic pricing
By Aaron Broverman • Bankrate.com

Way back in September 2000, Amazon.com came under fire from customers who discovered that the retailer was offering discounts of 30 per cent, 35 per cent and 40 per cent on certain DVDs to certain individuals. The company claimed the discrepancies were the result of a random price test, but the negative publicity made them relent and refund the difference to anyone who paid a higher price, pledging never to do it again.

This is dynamic pricing, a.k.a. price discrimination, or when prices move based on factors such as time of day, geography or to achieve a particular retail goal. Dynamic pricing is nothing new: Cheap Movie Tuesdays is an example of dynamic pricing used for years to encourage movie attendance during the week. What is new, however, is how specific Amazon was able to price items to the individual customer.

What Amazon did is known more specifically as online dynamic pricing. Online retailers can now use browser cookies archived on your computer to assess what you search for, buy, how much you pay for it and whether you’re willing to spend more. As a result, you may be paying more than other customers online and you may not even know it.

Challengers of the unknown
It’s the lack of disclosure that makes online dynamic pricing so unsettling compared to its terrestrial counterpart. Customers never know whether they’re paying more and what attributes the retailer uses to make that decision.

“You simply don’t know” says Andrew Gregson, author of “Pricing Strategies for Small Business” in Kelowna, B.C. “In the mass-marketing days, the flyers would go out, [ads] would go on TV, go on the radio or in the newspaper and it would say “Cheap Night Tuesday” and everybody knew — that’s transparency. With online, [the retailer] knows who I am, or at the very least, where I am based on an algorithm and they can adjust the price up or down depending on my background, buying habits and what kind of response the retailer wants based on that information.”

Isn’t that illegal?
In 2005, a study from the University of Pennsylvania revealed that two-thirds of the 1,500 Internet-using adults surveyed believed that it was illegal for online retailers to charge different prices to different people and 87 per cent strongly objected to charging different prices for the same products based on information collected about shopping habits.

However price discrimination is legal in the United States unless the basis for the discrimination is suspect, such as race, religion, gender and national origin, or if the discrimination violates price-fixing laws. In Canada, price discrimination is only illegal if a price advantage is given to one customer over competing customers who are buying the same quality or quantity of item. It is possible to offer different prices to different customers as long as they’re of a different category and not competing with each other directly. No regulations address online dynamic pricing specifically.

“They’ll never keep up,” says Gregson when asked if legislation should address online dynamic pricing. “The legislators are mostly old guys who are not computer literate. By the time they get around to making a law, the retailers have moved on. It moves that quickly right now.”

Ken Whitehurst, executive director of the Consumers Council of Canada in Toronto, has a different take: “There may be a whole host of market rules that should apply to online markets and don’t because no one has anticipated what the implications of these online markets will be. There’s not a lot of point in occupying legislators with hypotheticals, but if stock markets can be regulated, so can online markets.”

What you can do
So why the sudden popularity of a clandestine pricing practice that most believe should be illegal? “The Internet has contributed to a lot more price transparency,” says Gregson. “So, people have resorted to this sneaky, quick and dirty route to staying competitive instead of value selling.”

Both Whitehurst and Gregson advocate resisting the urge to click the first price you see and instead do your research when shopping online. What’s more, as much as it pains you to do so, you should read the privacy policy to find out what information the seller is using to potentially change your price.

“They are supposed to disclose what they’re going to do with the information, so people can look at the privacy statements and decide whether they’re going to do business with someone based on that information,” says Whitehurst. “I do think, though, the privacy statements now are not adequate. The method of disclosure is inappropriate in meeting consumers’ needs.”

Gregson believes the best defence is exposure and hopes the practice will disappear: “It’s going to change really fast. I think we’ll see a lot more online dynamic pricing and a lot of it will be hidden, until such time as it’ll be reported, just as it was in “Wired” and then CBC’s “Spark.” When people become aware of this stuff they’ll say, ‘Oh, that’s crap!’”

Aaron Broverman is a writer in Toronto

If you have any business that relies upon intellectual property, then you need to be seen and heard.

And what better way to be seen?

On the basis of an article I wrote on Dynamic Pricing and posted on my website,CBC National Radio program SPARK picked it up and interviewed me.

It helped my credibility a lot to have written a book on Pricing Strategies for Small Business but it was the public interview that got me noticed.

That discussion was aired and the Director of the Business School in Nova Scotia heard it. A few short months later, I was flying to the other side of Canada to deliver my message that pricing by design will build your business.

At the workshop’s mid-morning break, a lady approached me and asked me if I was from Kelowna. She told me she spent many summers in Kelowna visiting her brother who works at Mission Hill Winery. My wife worked there for 5 years so I asked for a name. Sure enough, I had met the fellow many times.

The world continues to shrink. But as the world shrinks and we are daily bombarded by memos, advertising, blogs, emails, radio, newspapers and TV, how do you get noticed?

Public speaking works.

I cut my teeth with bleary eyed small business eferral groups early in the AM. I polished the performance and now get rave  reviews and the opportunities are building.

Of course, part of my talk is a commercial. After all, I have an audience of the people I want as clients. But mostly I deliver a 12 minute talk that is packed wth information that can be used immediately. I end all of my talks with the commercial and my most telling comment – if you learned a bit today in 12 minutes what would you learn from a half or full day workshop?

Pricing Strategies instructs our clients and equip them with new skill sets and then position them to fight back effectively in their retail, service and contracting markets.

What our clients like is that we provide how to instruction to business owners and teach them 5 new tools to drive profits again using a pricing strategy that gains them customers, integrates marketing and pricing, improves profits and puts the owner back in the driver’s seat.

I urge you to Build Your Business and your network by selecting your audience, finding a topic and approaching a business referral group to talk to.

If you would like me to speak at your next meeting contact me directly at (250) 859-0752.

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-free: 1-888-959-0752
andrew@pricingstrategies.ca

Located on Canada’s stunning east coast, CBU makes its home on Cape Breton Island. Population of 110,000 residents, the municipality boasts the amenities of a city, with a welcoming atmosphere of a small town.

At Cape Breton University Professors get to know their students and will refer to their students by name. Cape Breton University is a community in itself. Being a small campus helps create a relaxing environment, a sense of belonging and a diverse population from over 50 countries.

Andrew Gregson will be presenting a public lecture on Thursday October 27th 2011 and also a Public workshop on the morning of Friday October 28th 2011.

Topic summary: Pricing is the ugly step-daughter of the business world. The bookshelves are stuffed with business topics on everything but pricing. Everyone has ideas on better marketing and sales. All staff can be closely involved in keeping costs down. But when it comes to pricing; that is too often a task left for a junior clerk. And yet it is vitally important.

During my talks, I blow the doors off conventional pricing wisdom, bringing the benefits of big corporation best practice and academic research into the hands the owners of small businesses.

This is not a high-brow, GE and Harvard Business School approach to the topic. Instead the illustrations are drawn from real life consulting experience in businesses in the US, Canada and the Caribbean.

To have Andrew speak at your University or Event Contact:

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-free: 1-888-959-0752
andrew@pricingstrategies.ca

I will argue in this first part of three short articles that all 3 factors – volume, price and costs -are given to misinterpretation. This confusion leads directly to bad business decisions and away from improved profits. Moreover, of the 3 important factors, one, pricing, stands head and shoulders above the others in being able to generate profits and build business. But, pricing as a business building tool, rarely sees the light of day and merely gathers layers of dust in the average company.

The volume error is to believe that dropping the price will instantly result in more customers at the door. After all, we were all taught the Law of Supply and Demand.  Rising prices march in lockstep with diminishing sales. So the opposite must be true – lowering the price must mean higher sales volumes.

This works for Wal-Mart, Dupont and GE. They have huge revenues and low prices. They continue their success because they have worldwide markets and have the buying power to demand certain price levels from their suppliers. But, in my experience with hundreds of small businesses, dropping the price leads to a collapse of profits. The giant companies were profitable before they “bought” market share. Pricing to buy market share precedes profitability not the other way around.

Small businesses do not have the market power to be the lowest cost provider in the market place. Indeed, being the lowest cost provider leads more often than not to business failure not success.

Certainly many companies try; so let us examine the impact of dropping prices. What happens in the harsh light of fact and mathematics in the average Canadian business if they cut their prices by 10% and change nothing else? We are isolating here, the impact of dropping the price alone.

Drop the price 10%.

The typical Canadian small business has a bottom line of 5% before tax profit. Dropping prices by 10% equals a 10% drop in revenues, so that translates into a 5% LOSS on the bottom line. And 5% is small enough that the company bleeds to death slowly and almost without noticing.

Pull out your financials and see how many more sales you will have to find just to keep standing in the same place.  And if your plan was to improve sales by 10% too, how many more customers will you need phoning you or coming through the door? And a further question – by dropping your price what kind of customer are you inviting to buy?

There is nothing worse for your firm’s morale than to continue to serve customers who do not understand or appreciate the value you provide. Given a choice between continuing a relationship with a toxic customer and the effect it will have on the morale of your team members, please note this story about former CEO of Southwest Airlines, Herb Kelleher humorously illustrates:

…(a) woman who frequently flew on Southwest, but was disappointed with every aspect of the company‘s operation. In fact, she became known as the Pen Pal because after
every flight she wrote in with a complaint. It was quickly becoming a volume until they bumped it up to Herb (Kelleher)’s desk, with a note: “This one’s yours.” In sixty seconds, Kelleher wrote back and said, “Dear Mrs. Crabapple. We will miss you. Love, Herb.”

Is the market big enough for you to attract that many more customers? What will be the response of the competition? If they drop prices too, to hold their market share, you both have now given up all your profits. Hmmm.  Now a price war! Isn’t there a better way to get more profit and build your business?

My final comment on scrambling to find those marginal sales is that most owners already work too much. I know. In my own business, I had to work only half a day. And you know what was the best part? I could choose which 12 hours! Work smarter, not harder, get a better profit strategy and build your business.

We are currently planning for pricing workshops in Canada and the Pacific NorthWest. Contact Andrew to arrange a full day workshop:
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
andrew@pricingstrategies.ca

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 ad is the author of Pricing Strategies for Small Business, now publsihed in Canada, the US, India and Russia.

Whether we like it or not, tax is part of life.

We pay taxes to pay for the delivery of public services like roads, harbours and airports and bridges. As employers, we remit payroll taxes; i.e.. we contribute to public and private pension plans, schemes to help workers hurt on the job, and unemployment insurance. But when these go unpaid, the taxation authority has huge and growing powers of enforcement. In this article, I will argue that not all debt is equal. Some debt is more dangerous than others and not even bankruptcy can save you from paying.

Simply put, some creditors have more power to enforce their claims than others. Although technically these creditors are unsecured and merely preferred they have the power to shut down your business, your life and everything in it. These creditors need to be paid first or negotiated with first. Why? Take this small, real life example. You may wish to pay $100,000 to a supplier first in order to keep materials flowing to the jobsite, but if a government agency scoops your bank account because you owe $6,000, then you are effectively out of business.

At the top of that list are government bodies. These are the tax collecting agencies like Canada Revenue Agency or Workman’s Compensation. They have the power, in only a few hours to get a judgment against you personally, and your company and freeze your bank accounts, padlock the doors, lien your home, and have all your receivables re-directed to the government. They can and will contact your customers to direct all monies owed to you to the government coffers.

And governing bodies, like Employment Standards, also enforce unpaid wage claims whether or not they are just unpaid or occurring as a result of a dispute. Even in a bankruptcy, unpaid wages get paid first and foremost ahead of any unpaid taxes.

Next on the list of dangerous creditors are enforcement bodies like Family Maintenance. They can, in British Columbia, enforce the payment of child support by putting a lien on your house making it impossible to re-mortgage. They can seize unemployment cheques, GST rebates and tax refunds.

Then finally there are property taxes which are enforced by a de facto lien on the property. Property can be seized and sold for back taxes. If instead you sell a property and the taxes are unpaid, then the taxes owing are taken from sale proceeds. Mortgages cannot be renewed with unpaid property taxes outstanding. And if outstanding a long time, the city or municipality has the right to seize the property and sell it. And even in a bankruptcy, the taxing authority has the right to claim two years of back taxes against the assets.

Just because it is the company that owes the money, by the way, does not always leave the owner clear of obligations. In some jurisdictions like British Columbia the old provincial sales tax became a personal obligation of the owners and directors if unpaid. Even in a bankruptcy, unpaid wages have a claim on the assets. In section 136 of the Bankruptcy Act;

(d) wages, salaries, commissions or compensation of any clerk, servant, travelling salesman, labourer or workman for services rendered during the six months immediately preceding the bankruptcy to the extent of two thousand dollars in each case, together with, in the case of a travelling salesman, disbursements properly incurred by that salesman …and.. commissions payable when goods are shipped, delivered or paid for..

Then there are secured creditors. These organisations have taken security against a loan to you. The security could be your house, the company building, equipment, and accounts receivable. Often this is registered as a General Security Agreement or GSA. The most common of course is a mortgage on real property. We are all aware that defaulting on a mortgage can lead to a protracted battle that culminates in seizure of the house and its sale to the highest bidder. What most people do not realize is that any shortfall in the sale proceeds net of mortgage payout, legal and realtor fees is immediately due and payable by the owner. That debt however is unsecured.

The second most common secured debt instrument in British Columbia is the Personal Property Security Act or simply the PPSA. This is the act that allows for repossession of equipment, vehicles and anything else pledged that is mobile, essentially. The act provides for right of seizure and for the shortfall on disposal of the asset to be a debt by the original owner.

And finally there are unsecured creditors. Typically these are credit card companies and your suppliers. The money you borrow from these people and companies, makes life simpler than trying to conduct business on a cash only basis, so of course, you have taken advantage of them. They can enforce their claims by closing your account and sending you to a collection agency. They report your travails to the credit agencies whose reports are then used to assess your further credit worthiness. Tumbling scores due to poor credit card management can restrict your ability to mortgage a house or get a car loan.

It must be obvious by now, that in programmes to restructure debt, due attention must first be paid to the danger quotient of the debt and its ability to hurt you and your business. This in turn, establishes the priority for attention, negotiation and repayment.

Finally, when the worry of debt is gone and cash is not totally dedicated to servicing that debt, you can Build Your Business. Remember that the people who worry least about money or a temporary downturn in business are debt free and have low fixed cost and you want to be there. 

Contact Andrew to discuss your business debt and start a new business strategy:

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
andrew@pricingstrategies.ca

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 ad is the author of Pricing Strategies for Small Business.