ARE YOU
PRICING FOR PROFIT OR POVERTY?
It
is hard to pick up a business magazine today without reading about how
some industry is in trouble because of price wars that have destroyed
margins, and
therefore the profitability of the entire industry. Whether it is the
automobile industry, the global airline industry, the financial services
sector or retail
sector, companies are struggling to survive because their profit margins
have been eroded.
The sad thing is, it is the companies themselves who have eroded their profit
margins. They have reduced their base prices, discounted, and offered special
deals such as interest-free loans - all to get business. In other words, most
companies are competing on price. This is folly because, as we are seeing,
competing on price is threatening the profitability of entire industries, not
just businesses within that industry.
It is also unneccesary because price is not the issue. No, really. Price
is not the issue. I’ll prove it to you. Does your money matter to you? Of course
it does. Have you shopped at a corner dairy or store associated with a petrol
station in the past couple of weeks? I’m sure you have. Do you know that you
are paying more to shop at these stores? Certainly, you do. So tell me, if
your money matters to you, why do you knowingly spend more than you need to? “Because
it is more convenient to shop at these stores,” I hear you say. And, of course,
you are right. We will pay for convenience; we will pay for speedy service;
we will pay for reliability. If I haven’t convinced you that price is not the
issue, think about this. What did you wear at work this week that you bought
simply because it was the cheapest? If price was the issue we would all be
driving Ladas!
If price is not the issue, you say, why do our customers talk to us about
price all the time? Because we have taught them to. Most of us do not understand
how to compete on value, so we have had to compete on price. Thus, our customers
have come to expect that we will offer discounts in order to win the business.
They know that all they have to do is threaten to take their business elsewhere
and our pricing policy will collapse like a house of cards.
How can you price for profit? The first step is to understand that it is
possible to increase your prices. I know a grocer who put his prices up 3%
last year and no one noticed, not even his staff. I told this story to the
CEO of an insurance company who laughed and said his company had increased
the price of one of their products and sales had increased! Both of these industries
are highly competitive and have customers who are thought to be price-sensitive.
The second step is to understand what your customers value. In other words,
you have to know what you have that your customers want so badly that they
are prepared to pay for it. What problems do they have? How much is it costing
them to have those problems? What would it be worth to them to have those problems
solved? Most companies do not know the answers to these questions and therefore
are susceptible to pressure to lower their prices.
Most customers will ask themselves (and you), “Why should I pay more?” The
third step to pricing for profit is to be able to answer that question. What
extra value have you built into your products and services that make them worth
more, in the eyes of your customers? Can you explain this to them in ways that
make sense and are believable? After all, it is your job to do this. Anyone
can make a sale. Getting a good price for your product and service is the trick.
I know it is tough. In this crowded and competitive market, pricing for profit
and persuading your customers to pay more is not easy. On the other hand, how
easy is it to run a business that is pricing for poverty?
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