07

Customers don’t always want the cheapest

Many business owners and managers feel that they are under constant pressure from customers to reduce their prices. Sometimes this is nothing more than a subconscious and unfounded fear of negative customer reactions, which we have considered in previous chapters. Sometimes it is explicit pressure from customers actually asking for lower prices, or threatening to leave, although this is usually only a small segment of customers rather than being representative of the whole lot. Most times it is just the normal request for a better deal as customers test the boundaries and seek to check that they are getting a fair deal.

This means that the last thing on many business owners’ minds is to actually increase their prices as there is a very real fear that the result will be lost customers. The challenge for all is to know when these fears are real and when they are not.

This chapter covers the myth that increasing prices automatically means losing customers, by addressing these key concerns.

This chapter includes just one key learning point:

Increasing prices doesn’t automatically mean losing customers

If a business is serious about profit improvement, it will invariably at some point involve consideration of a price increase. However, as explained above, business owners and managers are invariably resistant to this, and impetus to change must often come from an outsider – a trusted friend in another business or a consultant.

Whoever is advising the business, their detached assessment of the merits of a price increase will most often be met with the response:

 

No, I can’t put the price up, it is the only thing customers care about and I will lose them if I do.’

Are their customers really that price sensitive, or is it simply that these owners and managers are untrained in pricing issues? The reality is that most customers are nowhere near as price sensitive as we believe they are. A few examples will illustrate this.

Business owners and managers are too close to their own businesses to be sufficiently detached from the price issue. They need to explore their buying habits in other areas of their lives and then put themselves in the shoes of the majority of their customers. Otherwise their judgements are too tainted by just a small number of painful experiences with their own customers.

Ouch!

Q1 How did you decide on the last car you bought?

When anyone considers why they chose the make and model of car they drive they will produce a number of quite valid reasons:

In fact, whether consciously or subconsciously, there are dozens of individual elements to our decision to buy any particular make and model of car. It is a combination of some practical elements and some purely emotional ones. The key point is that when we have gone out to buy what is for most people the second biggest item of expenditure they ever buy, very few buyers make an exclusively price-driven decision and buy the cheapest option available. Whether you spend £50,000 or just £500 on your car, you can be certain that there were cheaper options out there. Price is of course part of the equation, and certainly we cannot spend more than we can afford, but that is simply one of a very long list of factors all put into the melting pot to form a decision. Some customers may be shopping in the used car lot with sticker prices of £999 to £3,999, and some may be in the luxury car showroom with sticker prices of £25,999 to £75,999, but within these affordability bands they still have the choice to spend more or less as they decide. When they have narrowed the choice down to a particular make, model, specification and colour of car, they may then look hard to ensure there are not identical options out there at a lower price. However, it is not a price-driven decision for most buyers.

Ask the average car salesperson, ‘How many people walk out of the showroom spending their original budget or less?’ They will tell you that it is a fraction of the numbers of people who completely blew the budget when faced with the highly polished car of their dreams screaming buy me! as they walked in.

A key element of the buying decision for cars is the emotional, or perhaps better named aspirational purchase. We buy it for what we believe it may help us become: how we look compared to our neighbours, or our subconscious aspiration to be the funky young couple in the TV ad.

So how do car manufacturers set their prices? Well they do a lot of upfront research and market testing. They use comparisons with other cars in their fleet to see where the new model sits, and with other brands to see who they would be competing against. And they absolutely know to the penny what it costs to make. But when push comes to shove, they just use their judgement as to what they may be able to get away with.

As previously covered, there is a danger with just guessing a number as you may set it too low and have excess demand and lower profits, or you may go too high and not sell enough.

One of the tricks of the trade on pricing that car dealers selling new cars excel at is the ‘Base Price Plus’ approach. What they do is advertise and promote an entry-level price for say a Ford Focus at £14,000. This compares favourably with similar-sized cars from other manufacturers. The problem for the dealer is that they make very little profit on this sale, in fact it may often only be a few hundred pounds. However, when the customer looks at the specification of the basic car they often opt to buy a higher specification model, or find a good number of extras that they would like on their car.

The advantage for the dealer is that many of these optional extras attract a significantly higher profit margin than the purchase of the car itself. How many customers do you think buy the base-level car at the advertised low price and add no extras? My guess is none. What this all tells us in answer to the question of everyone wants the lowest price, don’t they? is that when it comes to cars the answer is an emphatic No!

There are many elements to the buying decision, of which price is clearly one, although this may be better phrased as affordability rather than purely a price issue. What it also shows is another very critical point in pricing. Not all customers are the same!

The reason that there are so many variants is that each customer will have some factors that are more important to them than other factors. A young man buying his first new car may well have a lower budget for the core price of the car, and hence buy the basic model, but he may then place a far higher value on the benefits of the Bose sound system than he might on having a towbar as an optional extra. The couple with young children may have the budget for a higher basic specification model, and may then place higher value on rear seat DVD players or the easy-to-wipe-down leather seat upgrade.

By offering so many variants and then a host of optional extras, the car dealers are able to offer almost individual pricing to each customer, delivering a uniquely tailored product to maximize this price.

Now, the uniqueness of customers does not just occur when they are buying cars. Every customer you have is unique, and will place different emphasis on different elements of the product or services you sell.

We will return to cars later because they provide many other good examples of pricing strategies, as they are very expensive items and in industries where manufacturers have spent millions researching the buying habits and decision-making processes to work out how to squeeze as much money out of us as they can.

It is fair to conclude that when we look at cars from the perspective of the customer, we do not simply look for the cheapest option.

Q2 Why do you choose the supermarket that you shop at?

Once again the same question will elicit a whole range of answers and reasons. There are bound to be some readers who are upmarket Waitrose customers, some will be middle market Tesco or Sainsbury’s customers, and some might shop at low-cost brands such as Aldi or Lidl. Thus for very similar items of groceries, shoppers are choosing upmarket, mid-range or low-cost stores with prices that reflect this choice.

A typical basket of shopping will cost more at some stores than it does at others. The television is swamped with advertising campaigns from most major supermarkets where they promise to be the cheapest or give money back plus 10 per cent or using other similarly brave price-match deals. So it would appear that the supermarkets believe it is all about price. In actual fact what they are trying to do is to get the customer in the front door with price promotions on what are only a relatively small number of common products customers buy. Once they have you in store, there are a million other items they want to persuade you to buy.

Let’s just look at a few of their techniques:

What these examples demonstrate is that our buying decisions are not just price led. The chemical reactions to smells and taste can stimulate more sales. The engineering of places to encourage impulse buys, and simply getting customers into the right frame of mind to spend money can all increase the average spend.

It is important to note, however, that supermarkets do all have a distinct advantage. The majority buy in such huge volumes, and at such competitive prices, that they are able to sell at very low margins. Later chapters will explode some of the myths we have all come to believe on supermarket pricing.

However, just stand back from the detail of individual stores or TV price promotions, and you can see that across this market, some customers buy in bargain discount stores whether through financial need or their own personal judgement of value for money, while many others shop in increasingly expensive stores based on factors that are more important to them.

These factors will include:

One more issue on price as the decision-maker in supermarkets:

Tesco advertise a tin of beans for only £0.26p. If you do decide to shop at Tesco, and you are looking to buy a simple tin of baked beans, there are actually 46 different options that you could choose. These include four-packs, fridge packs, and single-person tins, one of which is indeed only £0.26p.

To ensure we make a clear comparison, let’s just look at a single tin of beans of around 400 grams in weight. Some brands are 415 grams and some are 420 grams, so we will just look at these tins using the pence per kilogram figure to get a real price comparison.

The cheapest option is the ‘Tesco Everyday Value Baked Beans in Tomato Sauce 420 g’ at a cost of £0.26 or £0.62 per kilogram. The most expensive is ‘Heinz Baked Beans 415 g’ at a cost of £0.70 or £1.69 per kilogram. Now you may simply believe that the Heinz product is better quality and hence worth three times the price, and you may see that with every one of the 46 options that customers can choose, whether including sausages, using organically grown beans, or because the brand suggests better-quality ingredients.

The point is simple. Some customers will spend more money on a variation of the same product for whatever reason motivates them to do so. Although Tesco may promote the fact that their beans are only £0.26 a tin, very few of the customers will actually buy this option just because it is the cheapest.

This principle applies to many businesses in many sectors. They promote the very low-priced entry level or basic product, but in reality very few customers actually buy this bottom end option. So while the perception of low price may well entice some customers to come in in the first place, it is rarely the sole element of the buying decision.

Q3 Which plumber would you choose?

Your washing machine has gone wrong and your laundry room is flooded. You know from experience or recommendation that there are four possible options for a plumber you could call. These are:

FIGURE 7.1

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Mr Efficient is an excellent plumber. He answers calls immediately, is there in an hour, and has any parts he might need in his van. He discusses whether to repair or replace the machine. The repair is done quickly, he tests the machine to ensure the problem is solved and cleans up the mess. He invoices on the spot and confirms his work is 100 per cent guaranteed.

Mr Efficient charges £100 for the work.

Mr Dreadful didn’t answer until a second call. He promised to come that morning but arrived the following day, only after another call. He suggested it was probably the motor, and disappeared for an hour to get one. He replaced the motor, left the old one, lots of mess and said he only took cash.

Mr Dreadful’s bill was only £40.

The other two options were variations of these, with Mr Ordinary being slightly better than Mr Dreadful but costing a little more at £55, and Mr Good being better again but costing £75.

How would you choose a plumber in this situation? What impact would each of the following elements have on your decision?

Obviously Mr Efficient does all the right things and Mr Dreadful does the absolute minimum.

Which one would you select?

In most situations of this type you will see around 20 per cent opting for the top price offer, 35 per cent for the next level, 25 per cent for the third level, and the balance of around 20 per cent choosing the cheapest option. The reality is that most of us are more concerned about the plumber actually turning up on time and doing a reliable job than we are about saving a few pounds.

The balance of these options depends on factors that are unique to each customer, such as whether they need to take time off work, or have a whole football team’s kit to wash for the following day. But in most cases the only customers that choose the cheapest option are those that are constrained by their budget. It is not therefore a value-for-money decision, just the fact that they don’t have the money to choose the more expensive options.

In this example there is only a small percentage of customers for whom it is truly an issue of being the lowest price. The vast majority of customers will pay more for a service that fits their personal issues of speed, reliability, etc. That principle is true of any marketplace.

Don’t allow your prices to be set based on the bottom, price-sensitive section of your customer base.

A major player in the electrical wholesale industry did a Europe-wide survey of their customers to find out the factors most important to them in the buying decision. This was the largest survey in that industry – ever.

They got a great deal of information, and boiled it down to the conclusion that their customers wanted three things (in this order):

1  on-time delivery (it must be delivered when it was promised);

2  availability of stock (a wide range and available on demand, so that they can get hold of core products instantly);

3  value for money (not price).

Note that price was the third thing on the list not the first, and that it was not simply the price itself but what the customer perceived to be the value for money, that was their concern.

What do these examples prove?

There are many factors, both consciously and subconsciously considered, in people’s buying decisions. Very rarely do we as customers go for the cheapest option simply because it is the cheapest. Why is it then that when we are setting our own prices, we completely ignore this and assume that our own customers are solely price led? It simply isn’t true.

The problem is that unless we make it clear to our customers what all the other factors that they could and should be considering are, then price is the only information they have with which to make their decision.

TR – Micro Software Limited

If price is the only data that customers have then that is what they will base their decision on. In fact, if a customer looks at your products or services against those of your competitors, and there is no other information on which they can base their decision but price, they would be mad to buy what they believe to be an identical item for more money. If you want customers to pay a little more, you need to help them see the difference between your options and those of any alternative suppliers.

Businesses that are large enough to have many teams of salespeople out looking for new business or managing customer relationships can do an exercise to list all of the great things they can say about their own company, to tease out reasons why customers should buy from them. Typically this uncovers things such as:

There can be dozens of these fluffy expressions which suggest that the business is simply a nice place to work and to do business with.

Digging deeper reveals more specific details:

This list often includes some really valuable elements to the service that the business provides to its customers. What is most illuminating is that none of these things are recorded in the company’s sales literature, often not shown on the website, and almost never discussed by the salesperson with the customer.

Now if we go back to the chapter covering the Value Scales you will remember that in the absence of these value-added elements, our only negotiating tool becomes lowering the price.

It’s quite simple really.

If you make price the big issue, then it will be the big issue.

You need to help your customers to make a judgement about the value to them of the various features and benefits of the product or service you are offering, and explain all the other great reasons they should do business with you. If you fail to do this then the only data left on which they can base their decision is the price.

What we all know as customers is that we are prepared to spend more on better quality or on better service where we:

It is clearly critical to ensure that customers understand all the positive reasons to do business with you in order to help you defend the prices you charge (or may want to in future). However, there is a minor issue of the chicken or egg variety to consider.

Should you get price on the table straight away and then run through all of the features, benefits and reasons to buy, or should you cover all these points and only cover price right at the end?

The most important point is that you do it at all. There are thousands of businesses that offer exceptional service and products of the highest quality that compete solely on price with competitors who are nowhere near their standards.

We found that the best option is to have four to six key points to explain to the customer before price is even mentioned, and only then to put a number on the table. Before the customer responds you should then have one extra thing to add that seems to be a special offer to them.

CP – Active Games Limited

This may go something like:

 

Before I tell you the price of that lawnmower, can I just let you know a couple of important points? We are the largest independent retailer of lawnmowers in the area, and we have grown almost exclusively from reputation and repeat customers, by making sure we give our customers exactly what they need. We only buy our products from carefully selected manufacturers where we are completely satisfied on the reliability and durability of the machines they offer. Every machine is checked before we ship it to the customer to make sure all the parts are included, so that there are no annoying problems when a nut or cable is missing as you sometimes get with the online discount stores. We offer an extended two-year guarantee as we are really confident about the quality of all the machines we sell.

The price of the mower you want is £795 including VAT.

But I tell you what, if you take the mower today, I will also deliver the machine to you already assembled, fuelled and tested to ensure that it starts first time.

Whether plumbing, lawnmowers, or any other product or service, each business needs to work out what their key points are and develop the right approach to get them across. If you do this well, then I have no doubt that you will quickly discover that price is only part of the decision-making process, not the only element.

Summary

In the majority of cases it simply isn’t true that people buy the cheapest option. They either consciously or unconsciously consider many other factors to weigh up the overall decision to buy or not buy something.

You need to establish what those factors are for your products or services and then explain them better, build them into your selling and marketing processes, and work on improving them so that they are better than your competitors.

Those businesses that have developed a clear selling message that includes elements such as availability, reliability, customer service, speed of delivery, etc, have made price a less important issue.

Price really isn’t the big issue:

We pretend it is.

Action points

1  Look at all the things you bought in the recent past and ask yourself the question:

 

Was that the cheapest option available, or did I consider (consciously or subconsciously) other factors such as convenience, quality, availability, branding, etc?

    Consider items such as:

    –  petrol (convenience rather than price);

    –  cola (brand loyalty or subconscious response to the marketing);

    –  trades services such as plumber or electrician (speed of response or reliability);

    –  restaurant (reputation, atmosphere, location);

    –  electrical appliance (safety/reliability or response to marketing);

    –  professional advice, eg accountant or lawyer (established expertise or reputation);

    –  medical services, eg dentist or physiotherapist (clean hygienic environment or caring personal service).

    Look through your cheque stubs or credit card receipts and look at the value of any items where you believe price was the deciding factor, and the value of all other payments where there may have been a number of other factors in the decision.

        Quantify the value of your spending that is truly price led and compare this with your spending where price was just part of the equation.

2  Once you have considered what matters to you as a customer on these various spending situations, get the pricing team assembled in earlier chapters to do the same exercise on their own spending habits, and then to look at your business and brainstorm all the other positive reasons that customers might do business with you.

3  Get that list marshalled into order of importance and consider how they apply to each of your top 20 products. Make sure they are well promoted in your sales material and covered in the sales conversations with every customer.

4  Get your frontline salespeople to discuss the following key issues and agree a clear plan of how they are incorporated into your selling processes:

    –  How do you maximize value from each possible sale? That is, what questions are asked to up-sell or cross-sell other products or services?

    –  What impulse buys can you prompt your customers to make? How are these promoted at the point of sale; whether at the till, sales counter or in the sales meeting?

    –  What steps do you take to ensure that your customers are in the best frame of mind to spend money with you? Consider how they are greeted into your business, how they are looked after if they are waiting, and the standards of customer service they will experience.