Price Advantage
Traders down the ages have wrestled with the pricing dilemma, always composed of the same elements, always difficult to reconcile.
Increasing the difficulty for many business managers is that too often they apply the wrong thinking to the dilemma seeking its reconciliation for the wrong reasons. They will, for example decide to cut prices simply because by so doing they believe they'll "steal a march on the opposition" (which of course could well start a price war they'll soon lose), or alternatively they'll jack up prices because their products are in short supply. ("Everyone is clamouring for the product and we shouldn't miss the chance to make a killing.") Guess they don't know the story about the goose that laid the golden egg.
In the cut and thrust of business with its inevitable clashes of personalities and ideas, many managers forget there's only one criterion for pricing, and that's profit - and because pricing has such a significant and ultimate impact on a business's profitability, it's arguably the most important issue managers must confront.
Time and again we see businesses selling themselves short. They may have excellent sales of goods and services, but this isn't the issue. The question managers need to answer is whether each sale is fulfilling its potential to contribute to the bottom line of profitability? Right pricing achieves the right balance between number of sales and profitability.
Sure, you've just shown a nice increase in profitability by implementing the results of a review of costs, but do the arithmetic right on pricing and you'll make an even bigger and better difference.
Many managers are frightened to increase prices because they feel it'll lose them customers. When you're playing for high stakes, as you unquestionably are with pricing, you absolutely cannot afford to rely on feelings. Rely on arithmetic. The reality may well be that though higher prices may cost a business a few customers or sales, bigger margins on fewer sales will in fact increase profitability.
In any case, the assumption that increased prices will necessarily lose customers, is wrong. Price isn't the only thing on which customers base their buying decisions. They consider service, product availability, convenience, salesmanship, brand and quality. And price is not necessarily the dominant factor in their decisions.
Yet business people, fully aware of this, still shy away from confronting pricing issues. They won't, for example, look at a product range or product categories, to work out whether they should be charging more. Managers may also be able to see that their current prices are barely high enough to make the effort of continuing in business worthwhile - they may even see that it isn't worthwhile.
And fiddling or guessing with numbers is as pointless as it is dangerous. Do the arithmetic. Here are examples (with running costs excluded to keep things simple). You buy a product for $10, sell it for $15, the 50% mark-up yielding a profit of $5. Increase the selling price an average of 10% over the time you're stocking the product and profit rises to $6.50 per unit. That is you've increased your profit by 30%.
Or look at it this way, suppose you sell 100,000 of the units for a turnover of $1.5m. If you increase prices an average of 10%, that's a $150,000 contribution to your business's bottom line. A small pricing increase greatly increases profit.
Even if in this process you lost 20% of your customers, you'd still be better off than if you'd kept them and not increased your pricing that average of 10%.
But you shouldn't treat all your products and services similarly, expecting the same margin of profit from each. They've got different customer demands, different levels of acceptability in the market, and so must be priced individually with the expectation of differing profit margins.
Charge what the market can bear, which means do your pricing from a customer's viewpoint. Ignore the cost of the product, a competitor's pricing and the size of your margins. Put your calculator away. The only way you'll know what the market can bear is by testing it. Pricing is not something set in concrete - something you set when you buy a product for sale. Your pricing needs to be flexible, a day-to-day consideration.
The same product or service may be priced differently at different times of the year - seasonally for example in the medium term, or short-term, occasional perhaps by unseasonable weather or a sudden unexpected change in the economic climate.
Regard products individually, applying different prices and margins according to demand - and that means looking at all stock, item by item, colour by colour, size by size. Don't be frightened if this indicates you should raise certain prices and increase particular margins - so long as this adds value from a customer's viewpoint. If a product provides a solution for a customer's problem, the customer rates the product's value as its worth in solving the problem, less its cost - and in some instances a customer is happy to pay almost any price to have a problem solved!
Note: Benefit to the customer resides not in price alone. Customers will see benefits in your products that, for instance, reduce their costs by being more reliably available than your competitors', or packaged better so as to stack better on shelves and otherwise save valuable storage space. So bear in mind that herein may lay other good reasons for you to raise the price of a product.
Never underestimate brand power. A black T-shirt sells for $20 in shop (A) and a virtually identical garment sells for $50 in store (B). How come? Store (B) brands its products making them desirable and valuable in customers' eyes. Shop (A) just sells commodities. The importance of a brand product's price to many customers decreases in direct proportion to the skill behind that product's marking. Way to go: establish brand recognition for your business and its products, and consider price hiking.
Discount is a dirty word and not one we use when advising our clients.
At Advantage One, if you would like to see the real power of pricing right, call us now and ask for our free 'Margin & Discount" analyser.
Tony Martin - Director
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