Mine Your Own Business

Do You Have to Cut Prices to Match the Competition?

Pricing is a frequent topic on Mine Your Own Business, one of the most recent ones was on June 10th in Time to Raise Prices? where we discussed if it was time to think about increasing the prices of your product due to the improving economy. While the economy is still slowly improving (at least for most of us), an article in USA Today caught my attention based on two things, the idea of cutting prices to match the competition and the fact that I'm on vacation in Florida and just flew down here from St. Louis via Southwest Airlines which is mentioned in the article (Southwest Airlines, not my vacation).

The flight from St. Louis to Florida was completely filled with not an empty seat, but the flight left on time, the crew was friendly and efficient, and we arrived on time. We got some snacks and a free beverage. What more could you ask for? The point made in the article is that Southwest Airlines provided just what we wanted, efficient transportation to Florida with minimal frills, something to think about when you are considering pricing for your small business.

Time to Raise Prices?

There was a recent article in Bloomberg Business Week making the point that since the economy is starting to improve now is the time for small businesses to think about raising prices. The piece begins by describing how many small businesses were hit especially hard by the recession and consumers are finally beginning to feel more confident. In this posting we'll be focusing on a main strategy presented in the article, setting prices based on perceived value instead of costs.

One excellent example of this concept is presented by some of the products sold by Tacony Corporation, high end vacuum cleaners. Our dealers face a great deal of competition from cheap vacuums sold at the big box store, so how they can they justify the much more expensive Tacony products? Here's a few ideas.

One of our premium vacuums is a better value than a cheap one for two reasons, repair and replacement. It is built to last for many years with minimal problems (you never need to replace the belt on some models), so in the long run one or our vacuums may actually save money due to less repairs and the frequent replacement costs for cheaper vacuums.

Carpeting will last much longer and needs cleaning less frequently. Replacing carpeting in a home is very expensive and it will look much better during the extended lifetime. Our vacuums are recommended by the Carpet and Rug Institute, in fact we have 10 vacuums that have earned their gold level rating.

A third point on vacuums is that if you keep a vacuum 10 years instead of 2, you are keeping 4 vacs out of the landfill.  At 20 pounds per vacuum, that’s 80 pounds saved.  For every 1,000 of our vacs sold, we are saving about 40 tons of material from going into landfills.

These are examples from the vacuum industry, but the same concepts can be applied to many different products. The point to make is that while the cheapest product may seem to be the best value, further research shows that this is not always the case.

Pricing Points

We ran across a great article from Inc.com that provides a very comprehensive overview of pricing. The article starts by describing just how difficult it is and also how essential it is to do pricing correctly for any business. After some general discussion on some pitfalls with regard to pricing, the article provides the following five factors to consider when setting up pricing.

• Know Your Customer
• Know Your Costs
• Know Your Revenue Target
• Know your Competition
• Know Where the Market Is Headed

The article gives a lot of good material to consider when thinking about the above points. The final points the article covers is When and How to raise or lower prices and the importance of monitoring the pricing you eventually set up. After all, the price of products can either make or break your business.

Pricing Dilemna

Small businesses are all well aware that price has always been a major concern with any prospective customer and in the past few years it seems that it has become more important than ever to many people. We ran across an interesting article that presents some ideas on how to honestly answer the question on price (usually the first question from a possible customer) and still have the opportunity to make the case to the customer why that price is justified for your product.

The article then gives some thoughts on why the price question is so important to customers and presents the following selling strategy. Answer the question on price and then follow up with a question that will bring them back to the features of your product or service that make it worth that price to the customer. There are a couple of very good examples in the piece that illustrate the concept. How do you handle the price question? Do you have a particularly effective strategy that seems to usually work for your business?

Some Great Pricing Tips

Here’s one of the best articles I have read on pricing strategies to consider in this economy.  I really liked the quick definitions/examples of Cost Plus Pricing, Market- Based Pricing, and Value Pricing.  Many of our most successful customers create packages of high-end products thereby using Value Pricing to protect their margins and still provide value to their customers.  What strategy works for you?

Bill

Fighter Brands

Sometimes you come across an article that seems to have been written with much bigger companies in mind but that really is applicable to your business.  I thought this article fit that description. 

Setting up a “fighter brand” to allow you to advertise lower prices to get customers to come in during tough economic times while protecting prices on your premium brand seems great if you are a Procter & Gamble, but what if you are a mid-size company like Tacony or an independent retailer?  Then I started thinking about it and found that we do offer Flagship and Fighter brands in almost all of our businesses:

Flagship:  Riccar and Simplicity Vacuums
Fighter:    Fuller Brush and Carpet Pro

Flagship:  Tornado Commercial Cleaning Equipment
Fighter:    Powr-Flite and Piranha

Flagship:  Baby Lock sewing machines
Fighter:    Sewing with Nancy machines

Flagship:  Regency ceiling fans
Fighter:    Professional Series fans

So, we have the brands.  Can you use fighter brands in 2009 to help drive traffic to your store?

Avoiding Problems with the FTC

[Disclaimer:  I am not a lawyer.  I don't play one on television.  The following should not be considered legal advice.  When in doubt, consult with your attorney.]

This post was inspired by a conversation on another forum about pricing.  To make a long story short, Dealer A was selling an item at a fair markup.  Dealer B was selling the same item barely above cost.  The question was, how could dealer A convince Dealer B to charge a more reasonable price?

The answer to the question is "He can't."  The Federal Trade Commission doesn't look kindly on two or more competitors agreeing on retail pricing.  In fact, it's a felony.  I don't know about you, but the last place I want to be is in federal prison, surrounded by murderers and thieves, when they found out I got busted for "acting together (with a competitor) in ways that can limit competition, lead to higher prices, or hinder other businesses from entering the market."  It could be a very long twenty years.

Seriously, the FTC defines "Price Fixing" as "companies getting together to set prices."  So, what's Dealer A to do?  First, contact the manufacturer.  US courts have established that manufacturers do have some rights when it comes to setting retail pricing.  Let them handle it.  Worst case--your rep might go to jail, but you won't.  (Be sure to send him/her a card at Christmas.)

If that doesn't work, stop carrying the offending line or product.  If you  can't make money on it, why carry it?  If it's a traffic-building brand, then you have to carry a profit line where you can make money.  [Hint:  Contact your Tacony Corporation representative.  He/she can help.]

Or, if you absolutely must sell the item in question, find ways to add value to justify your price.  Free delivery, free service, and free accessories are just a few things you might add.

Finally, the FTC has a booklet called "Competition Counts" that sheds some light on this whole "anti-trust" thing.  It's short and to the point, and you should have a copy of it on hand.  It's free.

Turnover

We're all looking for ways to cut expenses.  We've posted here before on some tips to trim everyday expenses, but the largest expense item for most retailers is inventory.  How do we reduce inventory expense without hurting sales?  As Bob Negin points out on his Whiz Bang Tips site, that's the $64,000 question. 

If you have too much inventory, you're wasting money.  If you have too little inventory, you're losing sales.  Hitting that happy inventory level that generates the most profits isn't easy.  One measuring stick is turnover.  If you bought enough inventory on January 1 to last all year, then your turnover would be one (1).  If you bought enough inventory at the beginning of each month to last thirty days, your turnover would be twelve (12).  For most businesses, the ideal figure is somewhere in between.

This chart from Bob's post gives a rough idea of average turnover rates for various types of stores.

 

But, turnover isn't the only metric for retail stores.  It's important, but it's not enough.  You have to look at other factors.

For example, take a look at the chart.  If a lumber yard can make 7.7 turns, how can an antique store survive on 1.7'?  There's another number to consider.  It's called gross margin.  Here's a very simple example. 

Let's say you carry two items, A and B.  You stock just one of each.  They both cost you $100.00.  You can turn item A ten times per year.  You can only turn item B five times per year.  But you sell item A for $125.00 making 20.0% gross margin..  You sell item B for $200, making 50 % gross margin.  Let's do the math:

	COST	MARGIN	TURNOVER/UNITS SOLD	PROFIT PER UNIT	TOTAL PROFIT
item A	$100.00	.20	10	$25.00	$250.00
Item B	$100.00	.50	5	$50.00	$250.00

If you look only at turnover, item A looks like the better one to carry.  If you look only at gross margin, item B is the winner.  But the reality is that they're both the same.

You have a lot of money invested in your business.  At the end of the day, you expect a return of that investment.  There are a number of other measurements that you can use to chart your business' performance, but turnover and gross margin, when used in combination, are a good place to start. 

Why Should You Go After the High End Customer?

It should be fairly obvious that there are advantages to working with higher-end customers.  But sometimes, it's good to review.  Here's an interesting item by Michael Furniss called "8 Reasons to Target Higher Paying Customers".  His 8 reasons, along with comments, are very complete, so I'm just going to list the reasons by themselves.  For more information, check out Michael's post.

1. They make you immune to price cutting wars.
2. They create the chance of a price increase war.  (I like this one.)
3. They give you more room to create special offers.
4. They are less likely to complain.  (I'm not so sure about this one.  What do you think?)
5. They are more likely to buy again.
6. They are more likely to refer similar people.
7. They are easier to manage.
8. They let you out advertise your competition.

I'm going to add a ninth one:  They are less affected by changes in the economy, gas prices, taxes, and all the other things that can cause low and middle-price shoppers to postpone their purchases.

Pricing Tips

Thanks to frequent reader and contributor Phil Engeman of Phil's Sewing Machines in Washington, MO for pointing out an interesting site.  It's called Pricing for Profit. 

On the site you'll find a number of articles on the always-difficult subject of pricing.  One that you may like is called "Pricing for Profits and Growth--It’s as Easy as Early Bird, Regular, and Chef’s Table".  In it, writer Rafi Mohammed examines the pricing strategies of a high-end restaurant.  As you can tell from the title, "early birds" pay one price, "regular customers" pay a higher price, and "Chef's Table" customers pay the highest price of all.  Rafi's lesson here is that you can price your offering based on the perceived value to the customer, regardless of your cost.

Another article of interest is "4 Pricing Strategies to Prosper in a Recessionary Environment."  The title is self-explanatory.

Finally, there's a timely post today on the subject of rose pricing during Valentine's week.  You may be surprised to learn that your neighborhood florist isn't getting rich selling the flowers for three times the normal price to desperate husbands. 

Like many web sites, this one's purpose is to introduce you to the author's consulting service, and there's nothing wrong with that.  But there's some good information here with no login requirement, so you might as well check it out.

For more on pricing, be sure to check out the "pricing" category on MYOB.  The link is on your left.

P.S.  If you haven't done it already, you'd better get your Valentine's Day shopping done real soon.