Protecting Your Profit Margins – More Pricing Strategies

It has often been said that there are two fools in each market. One charges too little. The other charges too much. So where is the middle ground? How can a dealer compete with the discounters, still maintain profit margins, and in fact, come out on top? As we discussed in our last article, pricing strategies are the key. Develop price credibility rather than just slashing price.

Packaged pricing strategies and applying lead-item pricing brings customers in your door and influences your customers to look for value in the complete package, not just the low price advertised at ABC Discounter. As I mentioned, we all have to face the price war game, but businesses don’t have to give into discount defeat if we learn to use more key pricing strategies like buying incentive (nonlinear pricing), price bundling, and creating a buying environment. In addition, knowing how to price correctly is imperative.

The independent business owner who, for example,says to his customer, “With the purchase of this copier I can give you a savings rate of 50% on your first purchase of toner,” has accomplished two important goals. This strategy allows a dealer to give “incentive” to buy more without giving away the store. It is similar to the “first pair at full price, second pair at half price” strategy. In fact, many people shop some stores just because that is their well-known and advertised pricing strategy. Giving reasonable savings on the desirable and necessary accessories items while preserving the margin on the big ticket unit opens the door for more sales and increased profit.

Price bundling is another great strategy. A parquet flooring purchase may include a new throw rug. The purchase of a new microwave includes a set of serving dishes. A new bicycle purchase includes a helmet.

A word of caution is wise at this point. The savvy business owner must know how to develop a pricing structure that includes profit. Without knowing how to do this, many owners can be their own worst enemy in the price war battle. They get trapped trying to offer lower prices than their competitors in order to get business. What they don’t know is that very same competitor might be losing money. Remember, we are value merchants, not discount merchants. Margin must be based on an accurate picture of your business structure, not just what you perceive, in a moment of price war panic, the competition is charging. Generally, margins are wider on accessory items or service, not on your core units. For example in the auto industry, the margin on the car is far less than the margin on the service. So why don’t you give a service package to capture customers for your business? Check your pricing structures. If you have a 15% margin on your core products, and a 35% margin on accessories, give the break on the accessories. Following is a brief profit margin grid you will find helpful.

To make a profit of:

10% . . . . multiply by . . . . 1.11
15% . . . . multiply by . . . . 1.17
20% . . . . multiply by . . . . 1.25
25% . . . . multiply by . . . . 1.33

More than one business has folded because owners didn’t understand how to build profit margin into their pricing structure.

Another pricing strategy that is not as tangible as incentive buying or price bundling, but is equally as effective is creating a buying environment. It takes special skill to develop an atmosphere where your customer is less cognizant of the price and more cognizant of the value and the experience. For example, a top-notch business I walk into may actually have color TV monitors showing people enjoying the product or service being offered! There needs to be an event atmosphere in the buying environment. It’s much easier to close the sale when a customer feels as if he almost experienced the satisfaction of owning the item right there in your store! This is a value building technique but is truly a pricing strategy as well. A typical customer is willing to spend more in an environment that takes him to where he is going to use the product. If I, as an upscale bicycle dealer, have an area behind my store where my customers can actually try the bicycle, price will become less significant. How often have people been drawn by the aroma of fresh baked bread and then can’t resist buying the bread machine? Its not a matter of tricking people, it’s a matter of creating the environment. If I walk into a recreational dealer and the whole environment is flat, what have I got to go on except price? Yet, if I am greeted by the images of a family having a lot of fun on the road in an RV, price suddenly is not the only motivating factor.

However, pricing strategies alone will not do the job of saving your profit margins. It’s not enough to merchandise a pricing strategy, your staff must be able to dialogue the value to the customer. How do you define service that is packaged with the sale? Call it your “Gold Tag Service” and define that you are going to give the two complimentary service checks with the purchase of a new car.

Clearly, strong and accurate pricing strategies combined with tangible definition is key to building a successful future. Its always easier to maintain profit margins by giving the customer the option of buying more through value incentive instead of buying down just to get the discount!

You can find more of Winninger’s business strategies in his dealer-focused books: Price Wars ($24.95) and Hiring Smart ($15).  You can contact the Winninger Institute at (800) 899-8971; e-mail at twinninger@aol.com; or visit our website.

Pricing Strategies That Make Sense

Low pricing is not a strategy! May I repeat? It is not strategy to discount price and give up your margins. Value pricing is a strategy and one you can count on to bring you business and continued success in the price war battle.

There are a number of ways to price and in my opinion, bold-faced discounting is not one of them! Too many independent retail photography businesses are giving into the pressure of discount pricing and end up losing the battle when, if they applied some solid pricing strategies, they could retain loyal customers and gain new ones who shop for value and not price alone.

I understand we all must at one time or another, face the issue of discounts and competitive pricing but it does not need to be at the sacrifice of the profit margin. Two solid strategies that can aid you if you find yourself in a price wars game are:

#1. Package Pricing
#2. Value Pricing

Our focus here is on Package Pricing. Package Pricing uses a tactic called “lead item pricing”. This involves pricing an item comparable with the discounter in your market and then offering your customers “package pricing” when they get in the door. So in other words, if I am pricing a digital camera at $999.00 because ABC Discounts down the street has it priced at $999.00 as well, I want to make absolutely sure that the item I am pricing is something for which they will want to immediately add items. This does not mean selling accessories to add on to the price, or the next time they come in, but showing them the way to have the other items they will need right away at one price.

How do I accomplish that? I merchandise a like item right next to the “lead price” item but it is “packaged priced” at $1499.00. Most customers will choose the “discount” item, right? Not necessarily! If I do my job right, I will show them that for $500.00 more they can get so much more VALUE, the price difference disappears. I have highlighted the packaged priced items, put spotlights on the package and gave it more attractive signage. My customer thinks, “Wow, for only $500 more look at all I get!” Customers see value, not price. You don’t give them the opportunity to just “think” about the options they would like to have; you package them together so they perceive they “must” have them and can get them all at one easy, value priced package. It’s what we call, “price point perception”. The $999.00 item gets their attention, but value does its job, rises to the surface and gets you the larger sale and the added profit margins.

If you can “package” your photographic products or services together for a great value, the first time purchaser is far more likely to walk out of your business without ever giving the discounted single item a second thought. After all, you’ve made the price difference pale in comparison to the value. Although I discourage discount pricing, if you find yourself in the market with discounters, “price point perception” can work for you. Customers must not perceive that you are so expensive they won’t even check with you to see what you offer. The strategy is this: pick out an item that you can effectively promote that has a price point comparison with the idea in mind that your customers will never buy that one anyway. They will buy the packaged one, but you have won the opportunity to get them in the door. The rest of the job is up to you.

The second level, or Part B of Package Pricing is to do away with the “lead item” and present your customers with the $1499.00 package right up front. The key here is that you have to be very good at this. You must be able to identify for them what they are getting for that price. In this pricing structure you are “selling the difference.” The customer must be able to easily identify or answer for himself what he is getting for $500.00. Ideally, he should be able to get 3 times the value compared to the price. So for $500.00 in “price” he should perceive at least $1500.00 in “value”. Value cannot equal price. Value perception must exceed price reality. In doing so, you can effectively give your customer true value and still maintain important margins.

For example, a retailer may offer a camera at $395.00 that a big-box store sells for $295.00. The customer must be able to clearly answer, “What am I getting for $100.00 more?” If the retailer uses package pricing the customer will go home with film, carrying case, cleaning supplies or accessories and a gift certificate to use at the photography section of the local Barnes and Noble or similar type bookstore. He doesn’t even have to show a lower priced item and then try to sell up, the savvy retailer just packages the value and sells it right up front! Despite today’s competitive discount price wars, package pricing is a very valid and successful strategy.

Winninger is the author of two popular independent retailer-focused books: Price Wars ($24.95) and Hiring Smart ($15.00). You can contact the Winninger Institute at (800) 899-8971; e-mail at thomas@winninger.com; or visit our website