I was talking to a client in the retail sector and reviewing the important figures in his company. A quick overview showed us that the sales were taking a dive and something needed to be done to increase those sales before the end of the quarter.
My first thought was to look at pricing strategies and consider an end of season sale to boost takings.
As a business coach, I usually guide my clients to the right answers. But in this case, the error in judgement and the potential profit impact was so high that I had to immediately banish the thought.
The idea that people will buy from you because you are the cheapest is totally flawed. There is a difference between price and value and the truth is, people are looking to buy value, not spend the least.
Discounting your product actually has a much larger impact on your business than you may think.
Imagine that your customer is paying £100 for your product or service. Let us take £60 as your direct costs. So with a total price of £100 and direct costs of £60, you have a gross profit of £40.
Now let us assume you decide on a 10% discount. You are reducing the amount that you get from your customer to £90. Your direct costs, however, remain the same at £60. Now you are making a gross profit of £30. The decrease in just 10% of the price is creating a 25% decrease in your actual profit. And the smaller your margin, the bigger the drop in profits.
So if you are planning to discount your product, make sure you assess the real impact on your business. Most of the time, it won't be worth it.
When business owners come to me for business coaching, they are usually trying to take their business to the next level. And yet, the only time they have ever increased their prices is because of an increase in costs.
This is a huge missed opportunity, especially for those who provide services. If you have been practicing your business for some years, your brand has gained value. You have proven that there is a market for your expertise and that in itself makes it more valuable.
When the value of your product or service has changed, you can reconsider your pricing strategies.
If your costs have not gone up, a small price increase can dramatically increase your profit margin. If your price is £100 and your costs are £60 and you put up your prices by just 10%, you are actually increasing your profit by 25%.
When you increase your prices, even by a small incremental amount, the effect on your profits can be just as dramatic as the damage that comes from discounting your products.
You cannot just increase prices whenever you like. You have to assess what the value is of the product you are offering and whether your price truly reflects that value. So your pricing strategies should focus not on price but on value.
One way of adding value is to assess your expertise. As a long-standing and trust-worthy business, you provide assurance to customers and you can add a premium for that assurance.
Another way is to identify your competitors and figure out how and why you are better. If you are not, then make yourself better so you can increase your prices.
It is possible to add value in some way without discounting, while providing a lower fee to your customers. You can do this by providing offers instead of discounts.
A really great example is what supermarkets do, where they offer vouchers for "£6 off your next £40 spend" or something to that effect. You can also create "buy 2 get 1 at half price" deals and add value without discounting too much much.
If you feel that you absolutely must offer a discount then make it work for you in some other way. An easy way to get value for your business out of a discount is to relate the discount to an early-bird payment or shorter credit terms such as, "10% off if you pay up front".
But whenever you can, say no to discounting. Instead, come up with smart pricing strategies to provide value without slashing your profits.
Copyright © 2015 Graham Thatcher
Value Based Pricing means charging what your customers are willing to pay (WTP).
The other day I was describing this to a successful, self-employed businesswoman and she kept asking, “How do I know what my customers are willing to pay?”.
I mentioned how she should put herself in her customers’ shoes, compare her offering to the competition. She said, “I don’t always know who else my customer is considering, and I certainly don’t know what he thinks about our offers.”
I told her she could use win/loss data to narrow down the possibilities. “I don’t have that many data points. Will this be significant?”
I described how she could use conjoint analysis to determine what types of customers are willing to pay for which features. “But that doesn’t tell me about the customer I’m talking to right now.”
I suggested she learn from her customers during the sales cycle. “Sure, but they aren’t going to tell me the most they are willing to pay, even if they know it.”
Finally, I conceded with an Aha! of my own. We will never know how much a specific customer is willing to pay in a specific situation. We can’t read his mind and he’s not going to volunteer that information. If we can’t know his true willingness to pay, what good is value based pricing?
Think of value based pricing as an attitude. We know we won’t always be right, but we are doing our best to estimate what our customers are willing to pay and charging as close to that as possible.
We can use experience (and statistics if possible) to guide our estimating methods. For example, if we continually lose, then we are estimating too high and need to lower our pricing. If we always win, we are pricing too low and need to estimate higher.
When you go to buy a car from a dealership, the salesman is looking you over, trying to determine how price sensitive you are. In other words, he is estimating your willingness to pay. He’s looking at the car you arrived in. He studies your clothes and your jewellery. Once you give him your address he will look up the value of your house. He can never know exactly what you will pay, but he can make estimates based on observable criteria.
This is what Value Based Pricing really is, estimating willingness to pay. If you know which competitor your customer is considering, that can help you know how much to charge. If you know which market segment your customer is in, you will price more appropriately. The more you know about this customer and this situation, the better.
This lack of precision is probably one reason companies like and use cost plus pricing. They know their costs (at least they think they do). If you always charge two times your cost, then there is no uncertainty. In fact, no thought is needed.
However, if you want to be more profitable, if you want to capture more of the value you create, then adopt value based pricing. Value based pricing enables more powerful pricing strategies, like price segmentation and product portfolio pricing. It has the power to focus the entire company on creating more value. Value Based Pricing may not be precise, but it is powerful.
Adopt the attitude.
Mark Stiving is a pricing strategist, runs Pragmatic Pricing, and is the author of Impact Pricing: Your Blueprint for Driving Profits.
Some people think that price is everything. My son currently works in my company, SellerDeck, sitting beside me in the home office. His job is account managing customers who use our ecommerce web hosting. It’s very instructive listening in. We’re not the cheapest offering, although we believe that we offer good value. Since you will start losing orders and customers the second your ecommerce web site goes down, and Google research suggests that marginally slow sites reduce orders by 20%, you would expect quality of service to be the major topic of conversation. Often it is, but for a minority, price is all that matters. In fact, there are relatively few products and services where price should be the sole criterion. These probably include electricity, where the same stuff always comes down the same wire anyway, and petrol, where rival brands across town often sell petrol from the same refinery. But some people always focus on price. The question is; do you even want to speak to customers who only care about price? Wouldn’t these customers be better hassling the competition? They not only pay less, they can also waste a lot of time. Competing on price requires the lowest possible cost base. So most businesses try to compete on overall value. My suggestion is if you aren’t losing a few customers on price, you probably aren’t charging enough. And those customers that you would lose from slightly higher prices, will probably be the very same ones that would be the least profitable and the most trouble.
Market research — the name alone brings moans and groans from customers and businesses alike. Somewhere deep down, we know that it’s worthwhile filling in those seemingly endless surveys to end up with a better, brighter, tastier product or service.
Market research plays a vital part in any business as it gives you insight into your market, your competitors, your products, your marketing and your customers. This way you can make informed decisions, such as which chocolate Easter eggs to stock. And believe me, this is hugely important.
Market research helps you to reduce risks by getting product, price and promotion right from the outset. It also helps you focus your resources where they will be most effective. Much information is available online and from industry organisations, and some of it is free. This information provides data on market size, sales trends, customer profiles and competitors. Your customer records also provide a wealth of information, such as purchasing trends.
So that’s the theory. With our experts like Kate Willis of KW Research and Steve Phillips of Spring Research Ltd offering their hands-on advice and tips, you can turn the theory into good business practice.
To make sure you know how to plan your market research so that you can find out which chocolate your customers prefer, check the Marketing Donut website — it goes live on 20 April.