Free Advice

How's your Pricing?

On September 18, 2002 the Wall Street Journal ran a front page article on how large companies have cut costs about as much as they can and now are looking to raising prices to increase profits. However, they can't just across-the-board raise prices in today's economic environment so they are looking for alternatives.

The Journal wrote that these increased revenues and increased profits will help the economy as it will spur increased spending and investment. Here's the top strategies they reported. I'm sure you'll recognize many of them.

• Charge more for small quantity orders (vs. giving the large quantity price for small orders)

• Reduce the quantity of the product supplied in the package

• Do a pricing analysis to determine if a price is worth charging or if the company should "pass" on the business at the price the competition is offering (the use of sophisticated software allows this)

• Survey customers to see what they would be willing to pay for a new or improved product 

• Drop your customers who are paying the lowest price

• Offer lower quality versions of product for customers who are price not quality sensitive

As a small business owner, you're faced with the same issues although you don't have the software, systems or analysts the large corporations have. What you have is the ability to know your customers (relationships), determine what their issues are and act. In other words, you know how to provide value. 

Solve Problems

First, figure out what problems the customer needs to solve. I recently spoke with the owner of a distribution firm. I can't reveal the company or industry but he he competes with major national firms, deals in a commodity, has a product list of over 100 items and sells to medium to large companies.

This owner provides a needed product and offers his customers specialty versions and quick turnaround. This specialty processing costs a little more but is still much cheaper than when the customer does it themselves. His customers can receive less than 12 hour turnaround --- unheard of with his big competitors. Sure he's not the lowest price but it's no wonder his profits are almost double the industry average.

Provide Alternatives and Benefits

The WSJ article shares the strategy of offering different versions to meet or beat price competitors. This is really nothing new for all businesses. The auto industry, with hundreds of models is a great example. In my business I know I can't offer the same services to everybody because everyone has different problems and issues. 

Customization should be the motto of small business. You may not be able to sell as cheaply, but you can provide alternatives. If you manufacture, your ability to change is probably easier than it is for large firms. Like the distributor mentioned above you can be nimble. Service and retail businesses can easier accommodate what their customers want. Bottom line, give your customers the option they need and they'll be willing to pay more to get that benefit.

Know when you're Dealing from a Position of Strength

A client recently shared how a large corporate customer asked about a price break on a big order. He knew that the customer had tested numerous products and found the one he represented to be the best. He also knew his product had a very favorable cost per unit. Working with his manufacturer, he figured the best price possible. However, he didn't offer the customer the best price. Instead, he instead offered a slightly higher price. The customer accepted it immediately and signed a one-year deal.

The name of the game is not to charge the highest price, lowest price or be in the middle. It's to charge a fair price based on the value you provide. The more specialized your product or service (the less it's a commodity) the better the chances you can charge for the value and benefits your customers receive.

© Copyright John Martinka 2002. All rights reserved.