Precision Pricing: Increase Cost Without Losing Business Value
Casey Brown, who presented at the first ever Gosigerfest Executive Session on Wednesday, September 23, presented her knowledge and expertise about strategic pricing using relevant examples of things we buy every day.
She asked attendees to guess how much random items cost, things like dish soap, tennis balls, toilet paper, hot sauce and gasoline. The audience’s estimates varied from item to item, but nearly everyone in the room knew the price of gas at the pump.
Because gas prices are posted on street corners, it’s a subject of daily small talk at the office, and we spend a great deal of our income on it throughout the week.
“On the other hand,” Brown said, “how often do you buy tennis balls, dish soap or hot sauce? You probably don’t visit the grocery store for these items as often as you visit the gas station to fill up your car, so the price of these items tends to make less of a difference in your overall budget.”
It's the same with your business, she continued. You have to find the hot sauce and the gasoline within your business. The hot sauce represents the products or services in your business customers don’t pay as much attention to; they don’t need them as often so they may not notice a price change. The gasoline represents the products and services in demand, so if the price rose, your customers would notice.
Brown advises not to treat all of your products and services as gasoline—though you may be afraid raising prices on even one item will cause your customers to leave you. So, find your hot sauce, and raise the price.
Now, although your hot sauce items are products and services that don’t sell as often, Brown emphasizes the amount of difference a small price change can make. It’s a lot, and she has numbers to prove it. Consider a sample company with a five percent net profit. Their revenue is one dollar, their expenses are 95 cents, so their net profit is five cents. If they chose to increase their prices by just 5 percent, that would result in $1.05 in revenue, the same amount of expenses at 95 cents, and a net profit of 10 cents. This means a 5 percent price increase resulted in a 100 percent profit change.
These numbers can also be applied to companies who frequently offer discounts to make a sale. So again, consider the sample business offering just a five percent discount on an item. Their revenue lowers to 95 cents from their previous dollar, their expenses remain the same at 95 cents… and their net profit is now zero, costing 100 percent of profit to the business. A small price change can make a difference.
Brown also addressed customer requests for price matching. A customer walks into your store, examines an item and asks if you can sell it for the same price as the guy down the street. Or, they pull the item up on their cell phone, where an online business is selling the same item for less.
Whether it’s a hot sauce item or a gasoline item, Brown advises to know your value. Don’t always negotiate.
“Based on the simple fact they got in their car, drove to your business and are standing in front of you asking that question is exactly the reason why you shouldn’t price match,” she said. “There is a reason they came to your store, rather than immediately buying from the guy down the street, or placing an order online. They’re showing you they want your product, just for less.
“Everyone wants things to be the cheapest, always. It’s human nature,” she continued. “But if they really want your product, they’ll pay your price.”
However, part of the pricing process is knowing your customers and what is most important to each individual. In the session, Brown asked attendees what kind of items they were willing to spend more or less on. Some would rather spend more on cars and healthy food, while others would rather spend less.
Similarly, Brown pointed out, certain customers may be more interested in the customer service provided at the car dealership or the grocery store, while others could be more concerned about the price of these items.
“You have to serve these customers differently,” she said. “A common mistake is letting the most price-sensitive customers pull the whole pricing model down, and then you miss out on the customer who cares more about service.”
Brown’s solution: consider your goals against the customers’ goals. The customers’ goal: find the lowest price from the best merchant. Your goal: make price a secondary consideration.
“You don’t need the lowest price if you’re the best,” she said. “Customers will never pay you what you’re worth, but what they think you’re worth. However, you can control their thinking, so make them understand why you’re the best."
“What problem does your product solve for the customer?” she continued. “Instead of selling a drill, sell them the hole. Make them realize why the hole you can provide them with this drill is better than the hole anyone else can provide.”
You’re not selling customers just a bottle of hot sauce or a gallon of gasoline, you’re selling them great flavor and a way to fuel their car to get where they need to go!
As the first Executive Session of Gosigerfest came to a close, Brown urged attendees to remember pricing lives in their heads. Customers and the market don’t control it, you do!