Value Pricing

OK, we’ve talked about your retail strategy and how it affects your pricing strategy. Now you’re probably thinking, “That’s all well and good, but what the heck should I charge my customers for my products?” That’s an excellent question. The answer is, “It depends.” Nobody said this was going to be easy.

 Let’s try to be a little more specific. For the sake of discussion, we’ll assume that you’ve decided to go after the “value shopper.” We’ll call the pricing strategy for this customer “value pricing.” The principles that apply to value pricing apply just as well to bargain pricing and luxury pricing.

 Much of the following information is taken from “Pricing Your Products”, a publication of the U.S. Small Business Administration. Here are a few of their suggestions.

 Suggested retail price. Most manufacturers provide “suggested retail prices.” Many retailers use this MSRP as a guideline. Depending on your industry, this may be a viable price, or it may not. It has the advantage of being easy to use. One of its disadvantages is that the price is set for all dealers in every market. It doesn’t take local variables into consideration.

 Competitive pricing. This is a strategy where you price your merchandise based on your competition. If you’re a supermarket selling two liter bottles of Coke, your price had better be very close to the competition or you won’t sell much Coke. You may not sell a lot of anything else either if your customers use the price of Coca Cola as a yardstick to measure your overall pricing. If store A is at 89 cents and you’re at $1.09, they may presume that you’re 22% higher on everything.

But if you’re not a supermarket your merchandise may not be as highly visible as the world’s best selling soft drink and your prices won’t get the same attention. But, and this is important, customers do compare prices on everything, especially over the internet. As we discussed, with a value pricing strategy you don’t have to match the competition. You do have to be aware of the competition and have a story to tell that justifies your difference in price.

 Pricing below the competition. You’ve seen the ads, maybe you’ve run them yourself, saying “We’ll beat any competitor’s price.” This is very hard to do and the net result is usually that you and the competitor end up making less profit.

 Pricing above the competition. With a value pricing strategy, this is probably where you’ll want to be most of the time. You execute this strategy by offering more and better service than your competitors. You may be asking, “Won’t this raise my operating costs?” Possibly, but if you can raise your costs by 5% and charge a 10-15% higher price, isn’t it worth it?

 Some components of better service have a cost attached to them, some don’t. Keeping up to date on the latest developments in your industry may require you to spend some time in reading trade magazines and surfing the web, but they don’t add much to your cost of doing business. Smiling and greeting your customer by name when they come into your store (and training your staff to do the same) doesn’t cost anything.

 Giving your customer a free loaner when their item is in the shop (when appropriate) has a minimal cost, gives you a huge advantage over many of your competitors, and might just result in a sale.

 Having a few  toys in an area set aside for your customer’s kids to play while mom shops costs very little, but may make the difference between a sale and no sale.

 You know the specifics of your business better than we do. The point is that you have to treat your customer so many different ways that she has to like one of them. And, every little thing you do to make the customer’s shopping and buying experience more pleasant, more convenient, more interesting to talk about gives you permission to add a little bit to your selling price.

 In a recent post we talked about Starbucks. How is it that they can charge $5.00 for a frappe/latte/cappuccino/whatever when McDonalds charges about a buck for a cup of coffee? It’s simple. You can have the comfy chairs, soft music, free wireless internet, free newspapers and the overall atmosphere of Starbucks or you can sit in a plastic booth and be surrounded by noisy kids at McDonald’s. It’s your choice. Your business is no different.

 “Great, but you still haven’t told me how much to charge for my stuff.” Finally, here’s something you can use. Start with your competiton, all of it. Shop the local stores including the big boxes if they carry what you carry. Don’t just shop your brands. Shop them all. Check out froogle and other online shopping sites. You’re looking for the bottom. What’s the cheapest price the customer can pay for my products or something similar? Don’t forget to add freight and handling if you’re looking at a web retailer.

 Next, take an honest look at your own operation. Make a list of all the things you offer that the competition doesn’t. Is it impressive? Great! Item by item, assign a dollar value. If you offer free delivery, what’s it worth? If you offer in-home service, what’s it worth? If you teach your customers how to use your product, what’s that worth? No false modesty here. You’re looking to establish a value. Be honest. If you were a customer, would you buy from yourself? How much more would you pay?

Walk outside your store.  Come back in looking through the eyes of a potential customer.  Is this a place where you'd want to shop?  Is it attractive?  Is it clean?  Would some new carpet or a coat of paint make it a nicer place to shop?  If so, it's money well spent.

 I live two blocks from a True Value hardware store. I live two miles from Home Depot. If the True Value store carries an item, I buy it from them. Why?  For one thing, I can always find someone to help me, and I need it. They will walk me through a project, tell me what I need, and help me find it.  Second, if I forget something, it’s a lot easier to go back two blocks than to go two miles. Third, the price difference is usually very small. Sometimes, the hardware store is actually cheaper.

 The bottom line (and that’s what we’re really talking about, isn’t it?) is this: When a customer buys something, they’re buying a total package. If they want the cheapest possible price and don’t care about service, speed, or convenience, they’re probably not your customer. They’re going to Wal*Mart or to the Internet.

 Your ideal, value shopping customer wants more and is willing to pay for it.

 Next time, we’ll talk about how you can actually beat the chain stores at their own game.