Exploding all of the myths about pricing
The views of business owners, CEOs, directors and managers of pricing techniques have been formed by what they see being done elsewhere or in many cases based on a form of urban myth. They often haven’t undertaken any research on the subject, read any books or engaged any experts to assist them in understanding this critical subject, in the way that they may well have done to get a grip on other business areas, such as employment law for example.
This chapter looks specifically at some of the myths that surround the way businesses set prices, and it will change your attitude completely.
This chapter includes:
Myth: Customers only want the cheapest
This is the biggest myth of them all, and the whole of the previous chapter covered it in detail. (If you jumped Chapter 7, go back and read it now.)
There are further myths to consider. Key decision-makers often use terms such as loss leaders or discount sales without really understanding the financial implications of the strategies they design. Or they may have set prices based on their view of some psychological significance of numbers.
A wholesale business based in Bristol has a number of branches throughout the UK. Multi-branched businesses are great because it is possible to test the impact of a whole host of issues by comparing the outcomes at various branches doing different things. In single-location businesses it is just harder to compare two different strategies and measure the results.
The Bristol-based company had one particular branch that was notorious for selling certain core products at ridiculously low prices when others in the group were charging much more for the same products.
The argument put forward by the branch manager was that these were loss leaders. He believed that by selling these core products at very low prices, it encouraged customers to come in and buy them, and that they then went on to purchase other products. He figured that if his branch charged the same prices as the other branches in the group then his customers would vote with their feet and shop at competitors for all of their stuff.
The basic logic of this is sound. If by selling product A at very low prices we are able to create a volume of customers who then buy products B, C, D and so on, then it may well be worthwhile doing this. The key question of course is whether the profit created by selling these additional products was more or less than the profit given away on the so-called loss leaders.
Because they had the advantage of a large branch network, they were able to compare the volume of the loss leader items sold from branch to branch, and then to see whether the volumes of other products were higher in the branch using the loss leader approach or not.
They compared two similar-sized branches in Cardiff and Birmingham. Cardiff was charging £30 for a 50 metre box of electric cable, a standard fast-moving everyday product. Birmingham sold this same product for £20.
Table 8.1
|
Cardiff branch |
Birmingham branch |
|
|
Selling price |
£30 |
£20 |
|
Cost |
£18 |
£18 |
|
Volume sold per month |
100 boxes |
200 boxes |
|
Profit per month |
£1,200 |
£400 |
The results showed that Birmingham generated only £400 – one third of the profit of Cardiff from twice the volume.
The question therefore is whether Birmingham was selling lots more of their other items on which it was generating additional profits and whether the extra profit from these items was more or less than the £800 it had given away by under-selling the cable.
They looked at the volume of cable sold by each of the various branches and compared this with the volume of a range of other products that the branch manager was convinced were selling better as a result of these special deals on cable. For simplicity, we compared the average results from all other branches to the results for Birmingham.
Table 8.2
|
Volume of items sold each month |
||
|
Product |
Average of all other branches |
Birmingham |
|
Electric cable |
110 boxes |
200 boxes |
|
Consumer units |
54 |
48 |
|
Switch plates |
423 |
442 |
|
Appliances |
34 |
38 |
|
Alarm systems |
15 |
12 |
The consistent result was that volumes of products sold by Birmingham were either barely above, or in some cases actually below, the average volumes achieved by the other branches selling cable at the normal higher price. It simply wasn’t true that the customers attracted in by the extremely low price of the cable were then spending money on other things while they were there. The conclusion, which was tested in a number of other ways, was that the customers were indeed attracted to the low price of the cable, but that this was having little or no impact on the volume of other products sold. They even found some customers who, when asked, confirmed that they often came in just to buy the cheap cable and then went to competitors to buy all of the other products they needed.
When they did the numbers the lost profit from this discounted price was definitely not being beaten, or even matched, by any additional profit generated from sales of other goods arising from these price promotions. There was certainly a higher footfall in the branch, but these customers were just taking advantage of the special deals and then moving on. This loss leader approach didn’t work, and actually undermined the whole company price position as many customers got to know that which branch they shopped in would have a big impact on the price they paid. Customers hate unfairness!
The truth of the matter is that it is once again a crisis of confidence or lack of knowledge of the salespeople. Somewhere they have heard that supermarkets sell bread and milk as loss leaders to generate customer footfall into the store, and that these customers then spend loads more money on lots of other items. So they have adopted this approach themselves, without the financial evidence to back it up. The reality is that it is simply much easier to sell a product for less than it is to sell it for more. The branch manager didn’t crunch the numbers to ensure that the strategy worked properly.
There are, however, a few situations where this approach can work, but it does require proper financial analysis to make sure that losing money on one product is justified by the profit that is made on another. What the business needs to do is to make the discounting of the first product to be conditional on the purchase of other products.
That is, the electrical wholesaler could have pushed the cut-price cable with a promotion that said:
The special price is only available to those customers from whom you are certain that you will make something back from other sales or as a reward to loyal customers that are already spending a lot with you. Whatever your business, selling some products at very low prices in the hope that it is generating profits elsewhere is very unlikely to succeed.
Myth: A 50 per cent off sale is a 50 per cent off sale
Consider what is perhaps the biggest lie of all on pricing issues – the 50 per cent off sale.
You will have seen many times on the TV, billboards and online, adverts for sofas, three-piece suites, kitchens, etc all offering massive discounts of 50 per cent off, or even higher at 70 per cent off the marked prices. These may be promoted as special Bank holiday madness or Balmy summer sales although we all know that most of these companies appear to have permanent sales.
How can these companies afford to give these massive discounts and still make a profit? Perhaps they are only promoting selected deals in the hope that this will bring customers into the store to buy other items at higher prices? Having just explored the fallacy of the idea of loss leaders above, and considering that these 50 per cent deals are usually across the whole range of products, it simply doesn’t make any sense for them to be discounting prices as a way of generating profits from other product sales. Certainly the odds on buying a second three-piece suite or a second brand-new kitchen are slim to say the least.
The objective of the store is to promote a compelling message of exceptional value that gets customers to come and take a look. They make their side of the Value Scales higher by pretending that the items are worth more than they really are. The 50 per cent off sale is nothing more than a marketing hook to get your attention.
The reality is of course that the discount is nonsense. Let’s look at a leather sofa from a typical high street retailer. The advert shows a special offer of 50 per cent off the list price of £1,000 reducing it to £500. Wow! A saving of £500 on what the customer would normally have been asked to pay for that sofa. A real bargain.
Look carefully at the advert or the small print on the promotional material and you will see something along these lines:
This item has been offered for sale at the full price for a period of at least 28 days in a UK store.
This narrative was brought in under the consumer protection legislation to stop companies simply plucking a price out of thin air in order to enable them to slash it with a fictitious discount offer. This prevents them from bluffing the customer into thinking that they have got a better deal than they actually have.
In the example, DFS worked out that they could buy a particular leather sofa for £300 from the manufacturer, and they would hope to sell it for £500 making a 40 per cent profit margin. They want to be able to promote it with a 50 per cent discount label, so they simply double the price to £1,000. They then stick it up for sale at this £1,000 price in the back of a store somewhere in the UK and bingo, 28 days later they can advertise it as 50 per cent off the list price. Whether they actually sold any at the higher price is doubtful, but in reality, irrelevant.
This practice happens all over the country in a number of different markets, particularly with those companies with multiple outlets and big advertising budgets. The truth is that there are no real discounts on these products, they are just capitalizing on the natural desire of consumers who want a bargain, and pretending that they can get a great deal.
Of course, from a business perspective, the big downside of these practices is that it is conditioning consumers to believe that the profit margins businesses make are huge, based on these high discounts that some businesses seem to be able to give away, and as a result we are seeing more and more customers expecting a discount on all sorts of purchases. A business that hasn’t artificially inflated the price to start with must now overcome the customer’s desire for these massive discounts either with better selling skills to explain why they can’t give it (and all of the other good reasons to buy from them), or copy the other retailers and start with a made-up price from which they are then able to discount.
The question is whether the presentation of the price does have an impact on the customer’s buying decision, or whether you are better off setting realistic prices in the first place and being prepared to defend against discount demands.
Myth: Presentation of the price doesn’t matter
Consider the ways in which you can present the price of a new dress, and how this may influence a customer’s decision to buy. The end result is that you want to actually get £100 into the till, so it isn’t whether the actual price makes the difference, just how this is expressed and how this in turn affects the customer’s perception of getting a great deal.
So how could you present the price of £100?
Table 8.3
|
Price presentation |
Underlying message |
|
The price is £100 |
Take it or leave it, that’s the price |
|
50 per cent off, now £100 |
Great deal, was £200, saved £100 |
|
Half-price sale, now £100 |
Great deal, was £200, saved £100 |
|
Special end-of-season price, £100 |
Worth more, but may be going out of fashion |
|
Offer of the week only £100 |
Worth more, but time limit to deal |
|
Now only £99.99 |
Special price – seems like a bargain |
|
Was £150, you save £50 |
You are saving money by buying this item |
|
£150 with £50 special cash back deal |
Cash back deal may be removed if you delay |
|
Our price is only £100 |
Implies competitors may be higher |
Now, there are lots of ways of presenting a price, and you can see above that how you present it can have a profound effect on how it is perceived by the customer. Just consider for yourself which of these is most likely to persuade a customer to part with £100. Is it the clear no-frills factual statement number 1 that says the price is £100 or is it option 2 or 3 where the perceived saving is greatest? The answer is that it depends on your customers; ie are they businesses or end consumers? It also depends on the product; ie is it a regular purchase or one-off occasional spend?
The critical point here is that presentation of a price can indeed have a profound impact on the customer’s perception of the deal.
Chapter 10 explores in much greater depth the financial implications of discounting prices and why it simply doesn’t work as a way of generating higher profits. It only works when it is used as a presentation tool to make the customer believe they have received a better deal than they actually have.
Myth: All prices should end in a ‘9’
You will see it everywhere you shop, whether clothes for £9.99 or £29.99, or even buying cars for £25,999. Although house prices rarely end in a 9, you can often see them promoted at, say, £399,995 for example.
So why is 9 such an important number?
Most people would suggest that there is some subtle psychology at work where £29.99 seems subconsciously good value, and it is in the £20s range of prices compared to just one penny more when it goes into the £30s range; ie one penny under a price threshold gives the customer a perception of good value. Maybe there is a little truth in that, as all of us will at some time have justified a frivolous purchase by saying something like it was only twenty something pounds or it was under £30 when we have just blown £29.99 on something we didn’t really need. But that is only a small part of the explanation.
So what is the true significance of 9?
If you are old enough to remember shopping in the early 1980s, you know that these were the days when we didn’t buy everything on a debit or credit card, but instead we used either a chequebook or plain cash. Using cheques was a pain and as a result the vast majority of normal high street purchases were paid for by cash.
As well as being before the surge in credit and debit card payments, this was a time when very few retailers would allow you to return goods for a no questions asked refund if you decided it wasn’t really what you wanted. Once you walked out of the shop, that’s it, deal done. As a result, there simply wasn’t the need to keep receipts for the purchase so that you could return that item a week later saying it was the wrong size or the wrong colour. If you are under 30 this may be hard to believe, but that’s what it was like!
In this situation, imagine that a pair of jeans was on the rack priced at exactly £20. You are in a hurry, you have no need of a receipt because you have no option to return it later, and you have a £20 note in your hand. What happens at the till? Well what could happen is that you give the cashier your £20 note and simply walk away. If you did this, where could that £20 note go? It would either go straight into the till, or it could go straight into the cashier’s pocket. Obviously the retailers tried to monitor this in a variety of ways, using mystery shoppers to test cashier honesty, and marked notes, etc, but it is a very difficult area to control properly. Therefore, to prevent this risk of cash theft, high street retailers priced every item at the highest price possible that would force the customer to wait for their change. Now the customer would hand over their £20 note and wait patiently for their 1p change. Even though this was an insignificant sum, customers would still stand and wait for change, forcing the cashier to ring the item through the till.
What this explains is that the prominence of 9 in the prices we now see on the high street is actually a result of decades of using prices ending in a 9 as a cash control mechanism, not some clever psychology of being below a key price threshold. We have all therefore become comfortable with the idea that prices should always end in a 9.
With the dominance of electronic payment methods, the importance of this as a cash control mechanism has now all but disappeared; however, customers have been indoctrinated into believing that a price with a 9 in it is to be expected, and that it is therefore likely to be the right price.
The real problem with this myth that setting prices just below key price breaks helps to encourage customers to buy, is that many businesses get stuck at prices just under a round sum amount and never get the courage to step over the threshold.
Chapter 11 explores in a lot more depth the significance of the actual numbers in pricing, but if you still work under the impression that setting a price at just below a round sum amount ending in a 9 is a critical psychological issue, then think again.
Myth: The best person to set the price is the salesperson
This is such a common statement spoken by salespeople; however, some others hold the view that the marketing team should set prices. But very rarely will you hear that it should be a decision for the finance department.
The justification for letting salespeople set prices is that they are closer to their customers, they know what their competitors are up to, and they need the flexibility to adjust the price at the point of sale to do the deal. This is perhaps a bit like letting the fox look after the chicken coop!
Setting prices is ultimately a financial decision. Any business needs to know what it costs to sell what they sell or do what they do. That includes understanding the hidden costs of running a business and how to properly allocate fixed costs across all of the things you sell. Even accountants can get embroiled in arguments about the best way to allocate overheads or absorb fixed costs. What is needed is a clear understanding of the financial impact of various pricing strategies. At a very simplistic level that may come down to a low price and high volume plan, or a high price and low volume one.
Armed with this information, the business then needs to understand what its competitors are up to, talk with its customers about what they want from each product or service, and a variety of other market research and investigation processes. Clearly the sales and marketing team are an essential part of the process.
Ultimately, price is a strategic decision for the business owners, CEOs, directors or managers to make. Where does the business want to fit in its marketplace? Does it want to be a premium price, high-quality business or a low-priced value-led organization, or even a pile them high and sell them cheap one? This should perhaps involve challenge and debate from all quarters to discuss the options, financial implications and the impact on the business’s overall strategy for growth.
What is seen in most organizations is that there is little or no debate from any quarter, and in most cases it is the sales director or sales managers that have the greatest influence on what prices are charged. Even if there was some higher-level debate involving a wider group, this input is often wiped out by setting carefully thought out prices from which sales teams are then allowed to indiscriminately discount. Chapter 10 covers this in detail.
The problem with letting salespeople directly (or indirectly via uncontrolled discounts) set prices is twofold.
The first point is that they rarely have the financial skills to understand the implications of the decisions they make, and are not always directly accountable for them. Within a number of organizations with teams of salespeople, you will find countless examples where they have followed a course of action without any understanding of the financial implications. This isn’t just the case with small businesses that lack any great sophistication on price, but happens in huge international organizations.
A number of online businesses have developed in recent years around the model of getting other suppliers to agree to give 40 per cent to 60 per cent discounts via daily deals to the online discount company’s members. These are often hotels or restaurants, but cover a wide range of small- to medium-sized businesses. These suppliers are persuaded to give a discount in order to generate greater customer awareness and a surge of sales from the huge online membership of the discount company. Sadly, the failure rate of businesses that have run such promotions is quite high. This may be partly due to the fact that it is businesses already in difficulty that try these promotions, but research suggests that it is also because they have made no effort at all to quantify the impact of a huge surge in demand at much lower prices.
The fundamental problem was that no one had worked out the true costs of satisfying estimated or potential levels of demand that the promotion would create. If your restaurant is in trouble already, the last thing you need is to be inundated by customers who only pay half of the normal price. Whatever your idea for generating new business, there is a need to look at the costs of such a promotion, both directly in any advertising and sales efforts, and also in the impact of any price discounts, air miles, or free iPads, for example. If the benefit of increased sales of locked-in new customers doesn’t match the investment then don’t go ahead.
The second concern on letting salespeople set prices goes back to the tourist attraction example earlier. If we set prices based on our worst customers, we will inevitably set them lower in seeking to avoid the conflict of complaining customers. In the example, they wanted to drop prices for over 99,000 happy customers to avoid potential conflict with a very small minority that complained.
It is clear that the salespeople in any organization are the ones most likely to have had those bad experiences and therefore most likely to seek to consciously or subconsciously set prices low to avoid conflict in future. Therefore the suggestion that salespeople should determine prices as they are closer to the issues is exactly the reason why they should not be allowed to set the prices.
In every business the process should involve a group of people who all get to offer their input into the pricing debate, including the finance team, the sales team, and even perhaps the people involved in the delivery of the product or service. It then remains the decision of the business owners and CEOs to set the overall pricing strategy. Rarely however will you see this being the way it is done, and even when there is that level of sophistication and thought, it is wiped out by then allowing people on the frontline to give it all away with uncontrolled discounting practices.
Myth: Setting prices is a once a year decision
In perhaps 99 per cent of businesses, the setting of prices is a once a year decision, although to call it a decision is to give it more importance than it actually receives within most businesses.
For those that do at least make some price changes, this is usually driven by a need to set prices for the season ahead (such as tourist attractions like DFAP, or other seasonal businesses for example) or a reflection of the habit they have simply got into of updating the price list in the same month each year. On the whole these businesses are not making any strategic adjustment, responding to market changes, or reflecting any revised assessment of the market value of what it is they are selling. It is just a mechanical price movement.
In an earlier chapter we explored the common ways in which prices are set, such as adding a fixed mark-up to cost price, or using last year’s prices as the starting point for this year’s, and any annual price adjustment doesn’t cover any debate on whether the formula for determining the price is right. In most business we could see upwards of five years pass before there is any clear change in pricing policy.
There are many problems with the infrequency of the debate on prices. Like anything you do, the more often you do it, the better you become at it. If you do anything once a year, you will have forgotten most of the key issues that you debated the last time, and will be in effect starting all over again with raising skill levels and building knowledge. Furthermore, the prices that you set for the year ahead are completely tainted by the situation that prevails at the point of the review; ie if that is just after a month of low sales and complaining customers, you may set them too low, or if it follows a period of great sales figures and some exceptional new customers being won, you may be too bullish and set them too high. We all appreciate that a business has highs and lows during a year and setting prices annually makes it more likely that they won’t be representative of your overall financial position.
In a really well-run business, pricing will be something that is on every board meeting agenda, and something that is openly debated and discussed on an ongoing basis. That may mean a revolving review of certain products each month, or looking at market sectors or particular groups of customers on a cyclical basis. The more natural we can make the discussion about prices, the less emotional we would be about the challenge of increasing them, or defending the issue with customers if questioned. Another point is made later in the book about the merits of little and often price increases where a business may add, say, just 0.5 per cent to prices in each of the four quarters of its financial year. Each individual price increase is insignificant when added, but at the end of the year prices are just over 2 per cent higher than they would have been. Many businesses can cope with justifying regular small increases but would struggle with a single larger one annually.
The problem for many businesses is that they have made price the big issue, and they often lack the courage to tackle the need to push prices forward and handle the fallout that ‘may’ result. By dealing with the issue on a regular basis, it simply becomes one of the issues that is discussed internally, raised with customers frequently, and any adverse reactions put properly into context.
If a business can make price simply another routine issue that requires attention, then a lot of the pressure or fear of the subject will disappear.
Any good business should have a process whereby they consider monthly, or at least quarterly, a range of business issues such as:
Myth: Every customer is worth having and every sale matters
A large stationery and office equipment supplier was struggling with cashflow and at some risk of failure. The owner called in a consultant to talk with some of the senior team about the financial realities of the business and the actions that were needed.
One of the issues that cropped up, and which was causing a significant problem for the business, was the issue of incredibly low profit margins on some items. The sales manager was explaining why he believed it was OK to sell a ream of paper at £3.85, when it cost them around £3.75 to buy it. His argument was simply that every sale counts and that it was another £0.10 in the bag towards profits. He said that they sell a lot of paper and all those £0.10s add up. He didn’t even argue that it was a loss leader, or that it led to happy customers buying other items, just that it was still a profit on every ream and that it all counts.
There is some logic to that attitude. They did sell a lot of paper, and they did make a £0.10 profit on each ream they sold.
The reality is that it simply wasn’t worth the effort needed to just make £1 on a sale of 10 reams of paper. So the accountants looked at the underlying cost of the product. They needed to add something to the raw buying cost of £3.75 to reflect the fact that invoices needed to be raised for each sale as well as monthly statements for each account customer, debts had to be chased, and deliveries made. His defence was that for most customers they were already invoicing for something anyway, and delivering something, so that there was no real extra cost involved for the paper.
Like the loss leader example above, there were flaws in his logic, such as many cases where paper was indeed the only product that some customers bought (because it was so cheap!) so there really was a cost to serve of handling that sale to that customer. Probably the most interesting thing was that the amount of paper they bought in was quite significantly different from the amount they sold out. There were several reasons, and if your business handles stock you will no doubt come across them on a regular basis. There were always some boxes that were damaged a little. This meant that they were sold off cheap or occasionally simply thrown away. Reams of paper have no serial number, so are hard to track, hence quite a few went home in employees’ briefcases for their home computers or kid’s homework, etc. The final issue was the customer saying if I buy twenty reams will you throw in one for free to which sadly the response was most often yes. You don’t need to be a mathematician to see that 20 reams at £0.10 each is only £2 of profit, which was completely wiped out by the cost (£3.75) of the one they threw into the deal.
The reality is that there are many occasions where the accumulations of all these small individual profits made is wiped out by one single event or action, and therefore actually not enough to reflect the real total costs of that deal; ie overall they lost money.
More importantly, he had missed a vital issue – time. The business probably sold over 100,000 reams of paper a year. That paper had to be checked in to stock. It had to be moved around, delivered to customers. Each sale needed an invoice even if they were doing a statement anyway for other items. Time costs money in the form of wages and National Insurance etc, but there is also a bigger cost – the opportunity cost of the time spent moving huge volumes of very-low-profit items that meant they were not spending that time looking after other customers and persuading them to buy more profitable products.
Look at a business that has a number of regular repeat clients or customers, such as commercial electricians or large printers for example.
If these businesses had accurate financial information to rank all of their customers based on the sales they generated, and if possible the profit they made from each one, they would undoubtedly see a wide range from the largest to the smallest. When you have the list, you can then draw a line at the point where it is probably uneconomic to do business, based on the administration costs of looking after the account, and perhaps simply the cost of taking on any customer in terms of opening credit accounts, setting up computer or physical files, sending out correspondence, etc.
Only you can decide where the line of uneconomic to do business is drawn. You could decide, for example, that any customer spending less than £1,000 a year isn’t really profitable, or you could draw it at £50 a year, it doesn’t initially matter. Wherever you draw the line there will always be a quite significant number of clients or customers that fall below it.
A survey of accounting practices asked these firms to list their clients by order of profitability from top to bottom. It was perhaps little surprise that the largest clients were generally (but not always) the most profitable, and the smallest generally (but not always) the least profitable, but what this survey found was that on average these accounting practices made 125 per cent of the firm’s profits on the top 80 per cent of their clients, and actually lost 25 per cent of their profits (to be left with 100 per cent) on the bottom 20 per cent of clients.
A firm making a bottom line of £100k a year actually made £125k on the bulk of its clients, but lost £25k on the bottom end of the client list.
Ouch!
This situation is extremely common across a whole variety of industries and irrespective of the business’s size. What is clear is that if the time and effort expended on the bottom 20 per cent of any business’s customers was instead spent making sure that the top 20 per cent were given exceptional service, managed more proactively, and cultivated for referrals to similar businesses, etc, profit would increase dramatically.
Sometimes the profitable decision is to say no and turn down that sale or get rid of that small, difficult customer. Most salespeople would do a deal at anything above the raw cost, and often get suckered into doing deals where they either lose money, or they waste time that could be better spent elsewhere. Not every sale is worth having, and some customers are not as good as others. If you want to make more profit, learning to say no is a key issue.
Myth: Raising prices loses customers
This is, of course, one of the underlying themes of the book. If raising prices is matched with better explanation of value, or supported by quality guarantees, then many customers may well be prepared to pay more.
In many cases the right answer is to raise prices and accept that you will indeed lose some customers, but that overall you will make much more profit from the ones that stick than you will lose on the ones that leave. So raising prices and losing customers is OK, and in fact can be a really positive thing, by weeding out the low-value, price-sensitive, complaining customers that you lose money on anyway.
The myth is really that losing customers is an inevitable consequence of raising prices.
One of the features of a price is that it conveys to the customer a perception of value and quality simply by virtue of the amount. If you wanted to buy a watch, for example, you would be able to walk down any high street and see a range from just a few pounds to tens of thousands of pounds, and the perception of the average customer is that the more you spend the better the quality of the watch. So is there a real cost differential between a £4,000 Breitling and a £10,000 Rolex? Is there really a difference in the actual quality of the watches? Well, no doubt manufacturers would argue that there is, but in all probability the raw materials element and the manufacturing costs would not be significantly different. The main difference is in effect the brand value. This is the premium that any buyer pays based upon their perception of the value to them of the image that owning a Rolex will convey as opposed to a Breitling.
Therefore, increasing the price of certain products and services will change the perception of some customers about the underlying quality you will deliver.
One local business was struggling to make a profit. It didn’t require much analysis to determine that they were simply not charging enough for the services they provided. For all of the reasons already explored in earlier chapters, they were petrified of the consequences of increasing their prices.
So it was suggested that a programme of calls to a sample of their clients should be undertaken, broadly like this:
I wanted to call you personally as you are a valued and important client. We have been reviewing our business to ensure we are financially secure and will be able to continue to look after our customers properly over the coming years. The simple answer is that we don’t believe we can do that at the low prices we are currently charging.
It is therefore our intention to increase our prices over the next 12 months so that by then we will be 8 per cent more expensive than we are now. I wanted to let you know that in advance and to make sure you know that the reason for this is simply to enable us to maintain and improve the quality and standards of service that customers like you expect from us.
I would hope that you would continue to do business with us, or at least let us know in advance any decision to leave. Can I count on your future custom?
Many of the responses were really positive, with some even saying that they were relieved with the decision, as they were keen to ensure that the supplier continued to look after them properly. There is a risk, of course, that many customers will say that they will stick around, and immediately go looking for an alternative. The situation was monitored, and six months later not a single customer had switched to another supplier.
The point is that many businesses selling top-quality items, whether jewellery, clothing, shoes, cars or holidays, use a high price to present a market position of high quality and exclusivity for their products. These businesses would not see any drop in sales if they increased their prices.
One final point is that prices can place a business into a particular consumer band, and that increasing the price can open up an entirely new group of customers. If you are trying to sell a house, you might place it on the market at say £299,000. Many potential customers may be setting their search criteria at £300,000 to £350,000 and wouldn’t get your details from any search. Upping the price to say £310,000, even if prepared to drop back down to the original price, will at least get you on their search list.
There are many myths that affect the way businesses and individuals set the prices they charge. These people have not taken an issue and decided to investigate the reality of it for their business or their products and services. They often take it at face value and set their prices based on this false perception.
All of these issues require attention, and for a group of people to debate and discuss all the key elements to the decision. If you leave the critical decision of pricing to your frontline team it will almost certainly result in profit being left on the table in many sales situations.
The true statements should be:
Get your pricing team to review all of the myths covered above and how they may be an issue for your business. In particular:
1 Review all of your prices to ensure that there are no intentional or accidental loss leaders; ie that every product or service is priced to achieve an acceptable margin.
2 Review the way that your prices are expressed in all published locations (ie in sales literature, on your website, etc). Consider the options for representing these in a more dynamic way, such as using the expression special prices, or how you can uplift the core price to present a larger discount. Develop a plan to test these changes across a small number of products to measure the reaction of customers.
3 Ensure that the pricing team meet at least quarterly to debate and consider changes to prices regularly. Set the meeting dates for the next four meetings to ensure they are in diaries and properly prepared for.
4 Get the finance people in your pricing team to determine the point below which it is uneconomic to do business. This would take into account the effort needed to manage even the smallest customer and the profit that you need to make for an account to be worthwhile.
5 Produce a list of all the customers that are below the level set at point 4 and decide on appropriate action for each one, ranging from simply telling them you no longer wish to do business with them, to increasing the prices (or reducing any discounts they get) or holding an open and direct conversation to explain the financial realities.