How Much Should That Doggie in the Window Be?
by Bill Glazer| May 22, 2011
According to surveys conducted by INC. Magazine, nearly 60% of all businesses set their prices based on their competitors' prices. Another 30% set them based on some kind of "cost plus" formula. I can ONLY imagine that this is also what is taught in marketing classes in colleges, those so called business advisors or worse yet... accountants. The reality is that while both approaches can yield information that should be considered, both approaches are severely flawed.
Let's look at both of these...
If you let your competition set or control or even influence your own pricing, you run the risk of being managed be people in significantly different circumstances than yours.
How can that be?
After all, they're in the same business, in my same industry, in the same town... aren't they? That may be true, but they may be a lot dumber than you are - in fact, let's hope they are.
Their prices could be too low or too high for any of the following reasons or others:
* They may be happier with less.
* They may be running a more mature business.
* They may be interested in volume at any cost to 'pad' the books in order to sell out.
* They may be more desperate
* They may be dealing with a different demographic group
* They may be inept at marketing and sales
* They have reacted to the economy by freezing or even reducing prices unnecessarily
The businessperson worrying too much about what his competitors are doing is usually paying too little attention to what he's doing. In some industries, the information that everybody wants most is the "survey" that shows what everybody is charging. I've never been all that interested in that myself. For example, I am often asked to speak about marketing. There are plenty of speakers out there who will get on a plane and deliver a talk on this topic for as little as $1,000.00. I don't care what others charge. Every year I've inched my fees up to my current, 2011 fee of $17,600 a day. If every speaker in America dropped their fees in half, I wouldn't change mine. If everybody doubled... I might! Which suggests one of the reasons this information may be useful is to make sure you're NOT too cheap solely out of ignorance. But you cannot let that same information dictate that you're too expensive.
Knowledge about competitors' prices in one thing, about pricing strategies, another. (Until I saw another menswear retailer charge for alterations in the late 1980's, I had no idea this could be done. Since then, we made a minimum of $70,000.00 profit at each of my stores by charging for this service.) You can't operate in a competitive marketplace intelligence vacuum even though you still want to engineer your marketing, so you wind up selling on a competitive vacuum.
Cost plus IS just as dangerous! Amongst the many mistakes K-Mart has been making this is one of them. K-Mart has been dually controlled by both textbook approaches of competitor's prices and cost plus formulas. For example, this led its Martha Stewart merchandise to be priced comparably to non-Martha Stewart merchandise of the same kind in its own stores and in its competitor's stores. With this kind of thinking:
* A towel is a towel is a towel
* A spice rack is a spice rack is a spice rack
* A lawn chair is a lawn chair is a lawn chair
If I were running the show, I would have created the store within the store boutique of "K-Mart Presents MARTHA STEWART". It would consist of an upgraded environment that you stepped into so you knew you have entered Martha's world (where subliminally communicated, K-Mart pricing doesn't apply). Why let your own non-brand, cheap towels compete right next to Martha's goods, driving down their prices and margins?
Perceived value is one factor that will effect your customer buying decisions, but it is about more than that.
Sales and Persuasion techniques must be learned so that you can lead your prospects and customers down a smooth and controlled process to ultimately close more sales.
Dan Kennedy's Sales and Persuasion techniques have proven to work time and time again... so well in fact that your prospects and customers will be asking you what they should buy.
Discover how to make price a NON-issue and how to bust through your customers buying buying barriers. Click here.
Cost plus, like competition, should not be ignored. When my Retail Stores were still in business, Steve Blake, who was running all of the operations, told me he discovered that a vendor tried to slip by a $2.00 increase on a dress shirt we stock. In this instance this would require an increase in retail that the item would not support right now. You have to keep firmly in mind that each penny of cost must be multiplied by whatever factor you use, to get to the selling price - and that there is some minimum multiple that you must have in order to function. A major direct marketing mistake is insufficient margin to permit sufficient marketing. HOWEVER, THOUGHT COST PLUS MIGHT INSURE THAT YOU DON'T GO TOO LOW, YOU CANNOT ALLOW IT TO DETERMINE HOW HIGH CAN GO, TOO - which is the other major mistake, usually made by business owners emotionally, out of fear or low self-esteem. Dangerous thinking is... . "But it only cost me X, how dare I sell it for Z?" This kind of thinking totally ignores the value received by the user.
Which brings us to one of the BETTER ways to arrive at price: value minus rather than cost plus: In other word, what is the actual value? what is the perceived value? then if you must... discount from that number.
You will probably learn this quicker with an example...
What is an apple worth?
If an apple a day keeps the doctor away, and the average cost of a doctor's visit is $50.00, how many doctor visits do we have to avoid paying for a year of apples?
If you're selling jewelry, how do you sell jewelry with the idea of how it will endear you to your loved one?
If you're selling furniture, how do you sell furniture with the idea that it will place you in a setting you will be comfortable in, proud of, and will enhance the resell value of your home?
If you're selling men's suits, how do you sell a suit with the thinking that it will make the wearer feel more confident and thus exceed at his job?
Hopefully you get the idea!
In a related way, price is set by what we can get. And what we can get has more to do with our own salesmanship than anything else. If you have any direct sales experience, you learn that pretty quickly. How can anybody sell a vacuum cleaner, water purifier, or set of pots and pans for $8,000.00, $1,500.00, even $1,000.00? It's because they control the selling and buying environment with an extraordinary sales presentation script, dramatic demonstrations, faux science, testimonials, exciting premiums, easy payments, know how to build value, etc. etc.
Does market control price? Not absolutely, yet different types of buyers do have different levels of price resistance. Most women's handbags cost a lot more than men's wallets. It's because women are willing to pay more. Conversely, men are typically willing to pay more to attend seminars than women, which is why you see 85% (on average) of males in the audience at costlier seminars.
Obviously, captive travelers in an airport are willing to pay more for a bagel than those let loose on a metropolitan city street. If you do your Christmas shopping in a mall in an upper end, classy neighborhood vs. in middle class America, the exact same item is priced higher in the former, lower in the latter.
However, you must never fall prey to the idea that "class" of customer absolutely caps price. It does not. More $800.00 vacuum cleaners are sold in middle and low-to-middle income households than in affluent ones. Like the poor craftsman blames his tools, the inept marketer too often blames his customers.
We definitely must get that the product or service itself does NOT determine its own value. How can a Japanese or French restaurant sell you a meal 1/10th as valuable by portion size, weight, or quantity on the plate, etc. than a steak restaurant for double the steak price? Or, if owning a car is all about the act of transportation... luxury cars could not exist.
We must be careful not to confuse reluctance to spend or inability to afford with price reluctance. These are separate challenges, too frequently lumped together as one, with one prescription... .cut prices. Instead, if this occurs, you may really be dealing with the inability to demonstrate the value of your product or service.
Finally, you must consider price in the context of all your business objectives. As I state earlier, the person positioning, a business for sale, or trying to enter a market dominated by an established player, or attacked by a discounter, may choose - wisely or not - to attempt buying volume by slashing margin. A marketer with high lifetime customer value may wisely be willing to discard all his front-end profit to more rapidly add to his customer base.
But never buy volume just for its own sake or worse to support infrastructure. Consider an example like this: If your gross margin is 24%, you could raise your prices by 10%, lose 41% of your total volume and still wind up making the same amount of money. Quite possibly working less and managing fewer headaches. Conversely, if you have a 25% gross margin, cut your prices by 10%, you need to sell 300% more to make the same amount of money. (Source: How To Sell For Prices Higher Than Your Competitors by Dr. Larry Steinmetz)
Now, ask yourself these questions: What's your pricing strategy? How does your sales process effect your pricing strategy? And are you slashing prices to compete with your competitors?
Bill Glazer, one of the most celebrated Marketing Gurus in the world, who along with the legendary Dan Kennedy have teamed up to provide advice to over 130,000 entrepreneurs worldwide in every possible industry and profession. Bill is a professional speaker, marketing consultant and coach, and a much sought-after copywriter. His book, "OUTRAGEOUS Advertising That's OUTRAGEOUSLY Successful," made four Best Seller's lists shortly after it's release in 2009.
Glazer-Kenndey Insiders Circle, owned and operated by internationally known marketing personalities Dan Kennedy and Bill Glazer, is THE place where truly smart, progressive, aggressive entrepreneurs with a love for marketing, a sincere desire to get rich and richer (with no apologies for doing so), and an optimistic, forward-looking attitude, gather' to exchange and share timely information and "what's working today" strategies and examples. Get Bill Glazer's #1 Bestselling Book, "Outrageous Advertising" for FREE. Click here.
Chia-Li Chien, CFP®, CRPC, PMP; helps entrepreneurs to creating business value that transforms their world. She is the author of Show Me The Money and columnist for WomenEntrepreneur.com & Fox Business online. She is available for consulting, speaking engagements and workshops. She can be reached at http://www.chialichien.com or firstname.lastname@example.org.