Increase Customer Spending

Hold the Price and Keep the Customer

When it comes to setting prices the majority of businesses are followers, not leaders. If they raise prices it’s always with the fear that customers will be offended, but they’ll lower prices to keep a customer or get a new one. They’re usually more price-sensitive than their marketplace. Look at any price ‘war’ – it’s about sales volumes rather than profitability. If all a business had to do was get sales it could sell everything at a loss and keep going until its capital dried up. Price wars are a step in that direction. Prices have to cover certain costs as well as enable the business to make a profit. If a price charged to a customer doesn’t cover the costs of providing the product and contribute to the business’ profitability it’s effectively creating a loss center for the organization. Businesses should do their pricing with a focus on their own enterprise and not try to match what their competitors are doing. This isn’t to say that prices don’t have to be competitive, but that doesn’t have to translate into ‘lower’. There’s a lot more to a value proposition than just price. Good management maximizes the profits of the organization. There are many ways to do this, from reducing production costs to making better use of promotional funds. If the pressure’s on to cut prices there are several things to consider. The first is the customer the business is trying to satisfy. Price is obviously a consideration, but what else can they be given that won’t erode profits? First, the business must be good at what it does. This means being everything from providing a top-quality product to doing the paperwork correctly. Be scrupulously accurate in details like order confirmations and invoicing, and if the business makes a commitment to its customer it must be sure to honor it. What else can be done? Plenty! The human side of every relationship is critically important when it comes to fostering thoughts of changing suppliers. Establish a personal link between the customers and the business – little things like Christmas cards and the occasional telephone call can be just as bonding as a low price, and a lot more pleasant over the long term. No business can please every customer. There are some customers that will simply not be worth pursuing a relationship with. Those who buy on price alone will only be with the business as long as it can come in below the best offer someone else has given them. This is not going to be the type of customer that will ever make a meaningful contribution to profits. Be open with customers. In a B2B situation they’re in business too and should understand that a profit is necessary to stay in business so there’s no need to apologize for wanting to make one. Give customers an idea of where costs originate and how important it is to them that money is spent on things like service areas and the quality of ingredients. A business should be selective in choosing its customers. It’s safe to say that if a prospective customer has a reputation for having the lowest-price offering they’ll probably be looking for other businesses to trade with them on the same basis, and that’s not the best customer to have. Businesses can sell the same product in different ways. If a customer wants to minimize the price they pay for a product, the business can work with them to do this. It might be possible to reduce a unit price if they order less frequently in larger...

Read More

Putting Together a Pricing Strategy

For many small businesses pricing products and services is more a matter of guesswork than logic. Mindful of competitor pricing, they make the mistake of simply undercutting to win business rather than carefully working out the price they need to charge – a price that not only covers the cost of doing business, but makes all the hard work worthwhile by returning a reasonable profit. Straight price cutting in response to competition is a dangerous strategy, one that can ultimately cut your profits to the point where you might as well sell up. Far better to sit down and work out a pricing strategy that reflects the nature of your products and market, AND makes you money! Covering costs The first step in developing a pricing strategy is to work out your overheads. It’s really important to identify absolutely everything that costs you money, including rent, wages, utilities, software, and insurance. Don’t forget to include your own salary in this. Also include the cost of servicing capital assets (loan interest and depreciation charges), including any IT equipment and vehicles that you own. Market research Once you have identified the costs associated with running your business you can begin to think about how you want to price your product. To get a feel for the market, it’s a great idea to find out what your competitors charge, though it’s inadvisable to base your prices on this alone because they might be offering a different mix of product and associated services, and their overheads are also likely to be somewhat different. Pricing strategies Reaction pricing – lowering your price because the person up the road just lowered theirs – is not usually a workable long term solution. A price war means no-one makes money. And if you position yourself as the lowest cost option you run the risk of customers leaving you when another, even lower priced alternative, comes along. Keep in mind that if your customers perceive your price to be too low, it will make them just as suspicious as when they perceive your price to be too high. Conversely, it’s important not to price yourself out of the market. So instead of just checking what price your competitors are selling at, evaluate the services they offer their customers and whether they market on the basis of any unique core differentiators. Then consider what you can offer. If you feel that what you can do is worth more than what your competitors offer, price your services accordingly. This is called a premium pricing strategy. For it to work, you need to be able to demonstrate your value to your customers in a convincing way and to get the message out among them. Be prepared to negotiate your prices to win business. Negotiation involves a little planning but is a useful business tool when used properly. To ensure you’re still making money, you need to build in a premium to the initial price quoted and also determine a price floor under which you are not prepared to go. Another pricing strategy that’s worth considering is straight discount-for-volume. Loss leaders are also an option, as are two-part pricing strategies. Peak pricing (when you charge a premium for made to order products or for work done at the last minute) is another pricing alternative you can look at. Price increases Take your time to do some homework on your product offering and selling points when determining your pricing strategy, because, once in place, it’s difficult to change without upsetting customers. If you are planning on raising prices, it’s a good idea to...

Read More