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 firstname.lastname@example.org; or visit our website.