The
Price is Right
Finding a
winning price strategy
Bob Barker of ‘The Price is Right’ knew the importance of finding that magic number. State a price that was too low and the prize might go to another contestant. Announce a price that was too high and you were out of the game.
In the game of business, you’ve got a lot more to lose than a new sofa. Yet the job of choosing the right price for your products and services can leave you feeling like you’re playing a game show, throwing out your best guess and hoping for the prize.
There have been many books written on pricing, but in reality, the issue need not be complicated.
The following are 6 secrets you need to know in order to win the Price is Right for your business:
1. Right price, more profit
Do you truly understand the sensitivity of pricing changes to your bottom line?
Price is a variable in the profit formula so having the right price, or the wrong price, will directly affect the profitability of your business.
What would it mean to your bottom line to increase your price by 1%, 5%, 9%, or even 10%? For example, if your business operates at a gross margin of 30%, an 8% increase in price can have a 53% improvement to your profitability, assuming your sales volume and your fixed overheads costs remain constant.
Amazing isn’t it?
And what’s better, at these numbers, you can lose up to 21% of your sales volume before your profitability drops to a level lower than where you were in the first place.
2. Flexibility is key
Price is NOT something you set once and forget about. Get in the habit of changing your prices to coincide with other factors, such as market conditions, cost factors, demand, and your positioning with respect to your competition.
You can adjust your prices upwards or downwards, according to the situation. Treat your price changes as tests and don’t be afraid to continue testing until you get it right.
Once you get the right price, remember that things change, sometimes quite rapidly. Reassess your prices every year or two.
3. Know how much you’re spending
This seems like a basic thing but you’d be surprised at the number of business owners who lack this understanding. In order to determine what the correct prices may be for your products or services it is imperative you understand what it costs to produce your ‘wares.’
Your costs of production will generally include the costs that vary with the amount you sell (e.g. materials), direct labour (e.g. installers, field workers, etc), and other direct costs (e.g. commissions incurred to generate the sale). You should also know the dollar amount of your fixed overheads.
4. Not every sale is created equal
Just ask the airline industry or book publishers.
Airlines sell different seats in the same airplane to go to the same destination for vastly different prices. They also sell the same class of seat at different prices depending on when you book your flight. Hard cover and soft cover editions of the same book sell at significantly different prices.
The way you package your goods or services will—and should—affect your pricing.
5. Find the right customer
It is imperative to understand that not all sales that appear the same upfront will yield the same level of profit.
Have you ever had any ‘difficult customers’ requiring more support than others? High maintenance customers cost more and cut into your bottom line, even when they pay the same price as other customers.
Ensure your sales staff understands this issue when booking the next order.
6. What’s it worth to them?
Regardless of what you think about what you do, it is the customer’s perception of what you do that affects price. How much value do your customers see in your goods or services?
Consider the following scenario of a business owner, John, who has a legal issue to resolve. John goes to see a lawyer. The lawyer’s office is nice but not flashy. The lawyer provides John with a solution that John understands and believes will solve his problem. Afterwards, John receives an invoice for $ 1,000 for services rendered.
John decides to get a second opinion and visits a second lawyer who works out of a more upscale office and location. This lawyer gives John a similar response but with a different twist, and afterwards provides John with an invoice for $ 5,000.
Whose advice do you think John will take? My guess is the second lawyer, simply because of the ‘perception of value.’
The moral here? Instead of thinking you have to reduce prices to win customers, think about ways you can increase value to charge higher prices.
7. You don’t have to come in low
Many business owners think they have to keep prices lower than competitors in order to win the next sale or the continuing patronage of their customers. This is a false assumption.
A study conducted in the U.S. revealed that price is generally NOT regarded as one of the primary reasons why businesses lose customers. In fact, price was not even in the top 6 reasons.
For reference, businesses typically lose customers because:
1% die
3% move away
5% have a friend who provides a similar service
9% go to a competitor
14% are dissatisfied in the level of service in some way
68% believe the business did not care about them
What are your prices and how are they affecting your bottom line? Perhaps it’s time for your business to review its current pricing strategies and look at implementing some new tactics.