Getting to grips with pricing will require you to make some changes in your business, and in any change programme it is important to deal with the objections early. In this chapter we discuss the reasons why most people want to change but don’t.
If people aren’t open-minded to the benefits of change on any business area, and someone challenges their actions or ideas, then they approach the analysis, research and the detailed debates needed to agree action with their defences up. Rather than hearing it as an honest observation of someone detached from the issue who is just trying to help, they fight the changes with a closed mind.
This chapter includes:
Many business people have understandable reservations and concerns about changing their business, perhaps thinking that’s easy to say but not so easy to do! So we need to address the issues that stop owners and managers from pushing the boundaries of pricing, and which may prevent you from using the ideas in this book.
The importance of knowledge and training
How do we get knowledge?
If you want to learn French you would expect to read books, be taught by someone with skills in that area, and practise in some practical way. You would not expect to know it instinctively, nor would you want to simply turn up in France and learn through painful trial and error. Learning the basics of any subject removes the fear of making silly mistakes and gives you the confidence to move forward.
Many people avoid action on pricing because they really don’t know anything about the subject. This fear of the unknown leads to indecision and inaction.
What you need to consider for yourself and for your business is what level of skills you currently have on the topic of pricing, what level of expertise you believe you need, and what is the best way for you to close the gap. You are unlikely to have these skills already, so get some training to boost your confidence.
Why are we frightened of pricing issues?
Most people also dislike confrontation, and are careful to avoid situations where it may arise. That’s why the majority of people having a really bad meal in a restaurant still answer the waiter’s question of ‘Is everything OK?’ with a ‘Yes’, even though it’s not.
Fear of putting prices up is actually a fear of the unknown, and a fear of confrontation. Consider the conversation between your salesperson and their client when a price rise is being announced. We enter into these discussions afraid of a negative reaction from the customer, such as an argument or them simply saying no, and with inadequate preparation for the challenge. The understandable reaction to this fear of conflict is to set and keep prices low.
We avoid raising prices because we are frightened by:
Are you too close to the issue?
Now this is far more of an issue in those businesses where the person setting the price is also the person in contact with the customer. Whether the business owner, branch manager or salesperson, those people that can directly affect price (by setting it or by discounting it) and who have personal contact with customers are the most likely to let this fear of rejection cloud their judgement. However, I have seen the same problem with finance directors and CEOs based on either the pressure from below (their own people passing on the fear) or their own personal experiences.
It is a lack of knowledge that causes this fear. If you understood how people made buying decisions, if you properly explored the value you deliver to your customers, if you understood the financial dynamics of your business to know where profits are actually made and what business you should turn away, then you would make completely different decisions. Knowledge in any subject gives us confidence to handle situations where fear may otherwise get the better of us.
Over more than 30 years in business I have met only a handful of people that have received any pricing training, or otherwise invested any time in understanding that key area. Many have indeed read a book or been on a course on sales training, people management, or perhaps even something as routine as how to use Word or Excel, but only a very few on the topic of pricing. It is therefore no surprise that, in the absence of specific knowledge and skills on pricing, most business people take the safest course and avoid the chance of a negative customer reaction by simply keeping prices low.
How to avoid the impact of your bad experiences
Let’s add another layer of understandable resistance to change.
Consider the Reader Challenge in the last chapter.
Why not go back to your businesses today and simply put all your prices up 5 per cent and just take the chance that it will work?
Put this book down, save yourself a few hours of time and just jack your prices up 5 per cent. Don’t think about it. Don’t try and calculate the impact or pre-judge the reaction, just put them up 5 per cent.
If you are a small business pick a few items and just put the price up 5 per cent. If you are the CEO of a major business, pick a branch or whole product line and just force the prices up 5 per cent. Go on, do it now!
Now, I know that most of you didn’t do it before and you won’t do it now. The question is, why not?
I know that each one of you right now has the image in your head of one particular customer who you know would resist any price increase, or you will have a clear recollection of a past bust-up over prices. This is not unusual. It is human nature to dwell on the negatives. If you have had bad service in a restaurant and found out they added someone else’s drinks to your bill, you will remember that for a long time, and probably tell all of your friends.
We remember painful experiences more easily and more vividly than the nice ones. Most of our actions are driven by two fundamental desires: pursuit of pleasure or the avoidance of pain. Many studies have concluded that we work much harder to avoid pain than we do to pursue pleasure. For example, people will work much harder to avoid losing £1,000 than they do to earn £1,000.
The problem is that we allow just a handful of painful experiences on price issues to cloud our judgement on the basic principles.
We only saw the downside of complaining customers or lost sales, and failed to see the upside of higher profits.
DW – Special Events Limited
Dr Fun’s Amusement Park (DFAP) was a tourist attraction in some financial difficulties, so agreed to increase the prices at the gate by 20 per cent, partially from the need to generate cash and partially because the real value for money was higher than the current prices.
The business became instantly profitable, but, bizarrely, the owner suggested reducing the prices back to the old levels because of the many complaints he was now receiving. On investigation he had around 40 conversations with unhappy visitors about the park and their view of its value for money, some of which were quite heated and upset him. So he wanted to go back to the old prices. A classic avoiding pain reaction.
Each complaint could be a family of four, which in context with the 100,000 visitors still meant 99.9 per cent of them didn’t complain, but he still wanted to drop the price by £1 for everyone purely to avoid conflict with just a handful.
The point is that all of us in business have had at least one painful experience on a pricing issue that is seared into our consciousness. We may have had 100 experiences where customers have been delighted with the value of our services, but it is those negative complaints that stick in the front of our minds.
This is a serious problem for many business owners, salespeople, and the managers, directors and CEOs of organizations, who can overreact to these painful experiences so that decisions on pricing are made with the very worst customers in mind, rather than those who do appreciate and value what we do.
Always be mindful that your reactions and opinions aren’t swayed by the small proportion of customers who have complained in the past or who may complain in the future.
Note: There is more detail on this case study in later chapters and the full case study can be downloaded from www.markholt.co.uk.
Blindly copying the big retailers
The problem of a lack of knowledge on pricing is exacerbated by the vast array of pricing messages that are thrown at us and our customers every day.
There is no doubt that many business owners see what big players are up to and copy their actions without understanding the facts or the rationale behind them.
It is common to see discount sales messages (50% off a sofa!) in magazines, on TV and on every high street. Some business owners are fooled into thinking that this pricing strategy must have been carefully planned to increase sales, and that this generates more profit than the discount that is being offered. Why else would these sophisticated businesses do it?
What they cannot know of course is the cost and hence profit being made on these items. If you are making 80 per cent profit margin, then you can afford to give a 50 per cent discount. Whether you should is another matter. If a business doubled the price they actually wanted to achieve simply to be able to offer it with ‘50 per cent off’, then they are not really giving anything away at all. It is just a selling tool and not a pricing strategy.
This issue can be seen in a wide variety of retail pricing ideas adopted by almost all of the major retailers. Consumer magazine Which? did a survey of over 700,000 products sold through all the major supermarkets over a year-long study. What they found was incredible and even perhaps questionable as to its legality.
Which? had examples from all of these retailers of bizarre ways that they presented their prices. One example showed ASDA increasing the price of a carton of yoghurt from 30p to 61p, and almost immediately offering a multi-buy deal of 10 for £4. This made it look as though buying a pack of 10 for £4, equating to 40p each, was a saving of 21p or around one-third off the normal price, when it was in fact an increase of 33 per cent on the previous price. As soon as the multi-buy offer ceased, the price of each carton was reduced back to 30p.
What this illustrates is that consumers are bombarded by messages promoting price as a reason to buy a particular product, when it is actually only the presentation of the price that is really influencing the customer; ie the volume of yoghurts sold on the 10 for £4 multi-buy deal was much higher than the number sold at even the original 30p price. So it wasn’t the price, or more correctly, the value for money that influenced the buying decision, it was the perception of great value created by the misleading prices.
Business owners see these pricing messages and feel compelled to compete, or they are under pressure from their customers who have been brainwashed into thinking everything should be discounted, bundled or otherwise reduced in price.
If you intend to use the presentation techniques that these big businesses use, your initial prices must be set at a level to absorb the promotional changes. If you didn’t double your prices to start with, can you really afford to offer a 50 per cent off deal? What you need to come to terms with is that these are not real prices. You cannot use these price promotion ideas unless you build them into your prices to start with.
There is an upside to this. These businesses have spent lots of money researching the best presentation methods to attract sales, and you can copy these methods easily and quickly. All you need to do is to ensure that your numbers work.
Limited financial understanding of how profits are made
Poor financial understanding is an issue with many small business clients. Sadly, it is also a problem in larger businesses where directors and managers are more departmentalized. It is rare that a sales and marketing director has had any formal training on finance.
If you are confident that you and your key people have a high degree of financial skills then skip this section; if not, take a look at the next few examples and consider how they may be affecting your business.
One of the most common questions accountants get is to explain the difference between mark-up and margin. I have lost count of how many people have told me they make 50 per cent profit when in fact they only make 33.33 per cent.
Mark-up is the profit expressed as a percentage of the cost price; margin is the profit expressed as a percentage of the selling price. The problem comes when the people making the decisions don’t completely understand the difference. I have seen businesses mark an item up by 100 per cent – ie doubled the cost to set the selling price – who have then given a 60 per cent discount to placate a customer, believing they could afford to do so. The mark-up of 100 per cent is a margin of only 50 per cent so they were now selling at a loss.
It would be easy to dismiss this as so obvious that no one would do it. However, if you sell many products with varying cost prices and different profit margins, to a range of customers, each getting different discounts, it is easy to see how busy people can misunderstand the numbers.
I have lost count of the number of occasions that I have found salespeople – acting in good faith – that were offering discounts greater than their profits.
This is almost always a result of a lack of understanding of the numbers, often by those at the point of sale pressured into adapting prices without realizing the impact, but also by those decision-makers setting prices and the discount policy in the first place.
If you look deeper at a business’s financial performance, the complexity of the numbers becomes more important. The previously mentioned example of the tourist attraction highlighted the overreaction of the owner to the complaints of a handful of visitors. What he missed was the simple financial equation that £1 extra from the 99.9 per cent of happy visitors significantly outweighs the consequences of a full refund to the very small number that complained. Ignore the emotional aspect of dealing with this conflict issue and the numbers are obvious.
When business owners are guided towards increasing prices their immediate concern is that they will lose customers. The only important question is how many? Will this loss of customers cost more or less than the extra profit they make from the price increase for those that remain?
The sensitivity of sales volumes to price increases varies enormously from product to product and business to business, but calculating how much sales you can afford to lose is just basic maths. For example, a business with a 30 per cent gross profit margin (buy stuff for £70 and sell for £100) could afford to lose 25 per cent of its customers and still make the same profit after increasing its prices by 10 per cent. The point to make is that many businesses simply don’t work out these numbers. They are making emotional decisions that avoid conflict.
People’s desire to please, and their freedom to do so
In larger businesses there is a huge gap between what the owners believe happens in their business, and what actually happens.
There are many reasons for this disparity, such as a lack of systems to ensure things continue to be done the right way. Telling salespeople to chase up quotes is not the same as having a system that monitors the quotes, forces the salespeople to take specific action to follow up, and then reports back to management when it hasn’t been done.
However, perhaps the single biggest problem is the desire to please but without consequence. The chapter on discounts covers the problem of frontline people giving away company money by simply ‘knocking a bit off’ as discounts.
Derrick is a great guy and customers love him. He is experienced and knowledgeable and customers will queue up for him when there are others free to help. They do this for one reason only – he gives them the very best discounts. The more he gives them, the bigger they smile and the more often they come back to see him, so he believes his customers love him. On the whole they do, but only because he gives them the best prices.
The problem is that Derrick is motivated by making customers like him personally, which conflicts with the business’s motivation to make a profit. If he hasn’t been educated or forced into balancing these issues he will continue to give away the company’s money.
Derrick’s desire to please people is basic human nature, so we have to put in place systems that force him to be more careful with the discounts or to make him share the pain. This could include getting manager approval for high discounts or having part of his pay linked to the amount he gives away.
Detaching decisions on pricing from those that have direct frontline contact will prevent the two-fold problem that they are overly influenced by a minority of painful experiences, but also prevents them making your customers happy by simply giving away your profit.
People need to be properly motivated to change
The problem is a little deeper than a simple desire to please, and it is linked to the fundamentals of why people do anything at all. Some years ago I worked with a small IT business. There was a problem that the software they designed was bespoke and would inevitably have the occasional glitch. This resulted in irate customers demanding immediate action and being very unhappy when the engineer arrived.
The final idea was that they took a large tin of Quality Street on each visit with the message munch on these whilst I fix the problem. Some months later when I spoke with the owner, he told me how well the chocolates were received, that he had won new clients as a result, won extra sales from existing customers, reduced complaints, and that generally it was working brilliantly. His only problem was that apart from him, no one bothered to take the chocolates when they went to clients. I asked him three simple questions:
1 Had he explained to the rest of the staff the impact he believed it had had; ie how many customers had he won, how much new business was gained from existing customers and what the impact was on their satisfaction levels?
2 Was there any penalty for failing to take the chocolates? Did their name go on a name and shame list in the staff room? Did three strikes prompt a written warning? Or did he just give anyone a hard time for not doing it?
3 Was there any reward for doing it? Did the person that took the most tins in a month get a bonus? Did the owner publicly say thank you and acknowledge the effort? Was there a league table of the best performers in the staff room?
It won’t surprise you to know that the answer to all three questions was a no.
As I explained to the owner, if the employees don’t understand the importance of the issue, have no consequence for not doing it, or no reward for doing it, you don’t need to be a genius to know that it isn’t going to happen.
The same principle applies to the issues of pricing. If we expect employees to understand without training, and to adopt a new practice without encouragement and reward for success, or challenge and penalty for failure, then they will simply fall back to the actions that give them personally the least pain or the most pleasure. What we need to do is to link their actions directly to their own pleasure (bonus scheme) or pain (warnings and embarrassment), so that they don’t give the business’s money away with impunity any more.
The desire to please is a very strong one. If employees are given freedom to make customers smile by simply giving them your money, then in all likelihood that is exactly what they will do. You need structure, rules and control, and reward when they do it right. Even business owners can be drawn into keeping customers happy through knocking the price down without thinking through the consequences of this short-term or knee-jerk reaction to a challenge on the price.
Raising prices may upset many people in your organization, so you need to invest time and effort into re-training people in order that their energies can be re-directed away from resisting the changes and towards achieving higher profits
It is crucial for any business that wants to improve its profitability that it has a clear understanding of the hurdles it needs to overcome to achieve this. That may be further financial training or simply more consideration of the most common mistakes made in pricing.
In most businesses a project to attack the issue of pricing will require some significant change. As such the people it affects must understand what changes are needed and why, and that there are consequences to fighting or ignoring the changes as well as benefits and rewards for embracing it.
1 Think carefully about your attitude to business, your motivation to improve and whether your experiences may blinker your willingness to explore ideas and make changes.
– Complete the worksheet Explore Your Attitude to Pricing (downloadable at our website www.markholt.co.uk).
– Identify the Derricks in your organization, and put in place authorization levels for the discounts they (and others) are allowed to give.
– Identify a list of those people within your organization who directly affect the prices you charge; mark those that require training on pricing issues.
2 Find a local trainer who can help train your team on the key issues. These may vary wherever your business is based, but try:
– your local Chamber of Commerce and Industry;
– your accountant;
– the RAN ONE organization;
– your bank manager.
3 Download the Pricing for Profit iPad App from the App Store and explore where your business can have the greatest impact on profits. I guarantee that price will be top of the list.