Protecting Your Profit Margins – More Pricing Strategies

February 4, 2009

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

February 2, 2009

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


The Key To Loyal Customers – Products and Services With VALUE!

January 30, 2009

Stand on Price Alone and You Will Fail

What is value? Simply put; it’s whatever your customers think it is. More specifically; it’s convenience; service; quality; variety; knowledge; after-sale follow-up; and price. Value is the human factor. It’s what you can add to your product or service that will draw customers in and keep them coming back. Let me give you an example of what value isn’t. I recently returned from a flight to discover that my car; which I had left at the airport; had a flat tire. I called a servicing tire dealer and explained that I wanted him to pick up my car; install a new set of tires; and deliver the car to my home no later than 8 a.m. the next day.

After a few seconds of silence; he said; “We don’t do that.”
“You don’t do what?” I asked.
“We don’t pick up cars; and we don’t deliver them;” he said. “Are you a member of Triple A?”
“Yes;” I responded.
“Call Triple A and have them bring us the car;” he said. “Then we’ll call you when it’s finished; and you can pick it up.”

I don’t think this tire dealer understood me. I hadn’t even asked the price of the tires. I wasn’t buying the tires; I was buying the service.
This kind of non-service will drive customers away and into the hands of mass merchandisers from whom; I might add; I can buy tires very similar to those servicing dealers sell.

The man I had dealt with has probably been glaring at full-page tire ads run by mass merchandisers while he is going out of business because he thinks he can’t compete. He doesn’t realize that his business is not “selling tires.” His business is “service” and what he does for the customer while he sells the tires. What makes your products or services worth the difference in price to the consumer? The answer should be value. If you make price stand alone, you will fail- Stress the difference between price and value. It is critical that you define the value of your product or service to the customer and be as specific as possible. What is the value she receives for the money she pays? Do you deliver? Do you provide the freshest merchandise? Do you provide technical assistance by well-trained people?

You can’t beat the price merchant by lowering prices. You can only win by redefining the value you bring to the customer.

Factoid: Value is more important than price.

Tactoids:

1. Convenience: Do whatever you can to make it easy for the customer to do business with you. Take orders by FAX; conduct business at the customer’s location, offer a 24-hour phone service, deliver the product.

2. Quality: Make sure your product or service stands up against the competition.

3. Service: One of the most effective ways to differentiate yourself from your competitors is with responsive service that’s even better than customers expect.

4. Variety: Offer customers a diverse selection of products of services, then let them select those that best suit their needs.

5. Knowledge: The more you know what others need, the more valuable you are. Identify yourself as a specialist. Offer seminars or write a book. Know your products or services better than anyone else.

6. After-sale follow-up: Do something so unique after a customer transaction that it immediately identifies you as a premium value merchant. A grocery store chain assigns names of regular customers to each of its cashiers, who then call to thank them for their business. The Mayo Clinic encourages its physicians to spend at least one hour with each patient during an exit interview to prepare the patient to return home.

 

Thomas Winninger – 612 896 1900 – Thomas@winninger.comwww.winninger.com


Tipping Points

January 26, 2009

What is a tipping point, or what some people refer to as a turning point? What made it happen? What were the characteristics that set it apart? I am reading a fascinating book about A.C. Gibson, the founder and inventor of the erector set. I am reading the book because over the holidays I happened to catch a television special related to boys toys that was entitled “The Man Who Saved Christmas.” Isn’t it interesting that the show about A.C. Gibson and the erector set was on television at the same time that book appeared on the bookstore shelves? That is a question for our next session.

Tipping point is when something so significant happens that the future direction of activity is significantly enhanced. It might be person that you meet in your life that changes your life forever and you are smart enough to take advantage of the opportunity and not let it pass by. A.C. Gibson had invented this wonderful kit of parts similar to the steel girders used in constructing a building. As a matter of fact, he was actually in the magic business, creating magic tricks and selling them under a company called Mystic. He was riding the train from Connecticut to New York when he looked up and was fascinated with the way that steel workers were assembling the structure of steel to support the building. Going home that evening he sat with pencil and paper and drew out the components for a toy that would give kids the opportunity to build things with motors and parts that were similar to those structures.

He produced the erector set and put it in a big box. It weighed a ton. Actually about 150 pounds but as games go, that relativity is a ton. He could not sell it. One night his wife, pregnant with their child, was thinking about the toy that A.C. had invented. The realization came to her that the reason no one was buying it was because they couldn’t see it because it was in a box.

As the story goes, she woke him up and said, “Take it out of the box. Set it up in the toy store. Let people see how fascinating it is when it works.” He did as she said and the rest of the story is that A.C. Gibson Company became the number one toy company of its time and went on to create other creative toys for kids. They claim that their engineering, construction, and scientific career were based upon their experiences with toys made by the A.C. Gibson Company. This man received over 30,000 letters a month from kids.

The point of the story is not in his success, but in the thing that changed the future direction of the company: the tipping point. Every business and career has it. Unfortunately, sometimes it gets passed by. Sometimes we don’t recognize it as an opportunity. In my business we always say, “we hope the book gets legs.” We hope that it gets its own energy, similar to the energy of the book “Who Moved My Cheese.” This book had its turning point when a major United States corporation read the book, found that it was applicable to their people, and ordered thousands of copies. All of a sudden, the book started getting the recognition that it deserved. It is now selling over 12 million copies and is one of the most successful titles of business books of all time. A simple little book, less than 120 pages, that everybody can relate to because somebody has moved everybody’s cheese.

The tipping point. How do you identify tipping points? Well, again it can be an idea, a person, a connection, or a significant uniqueness that sets you apart from everything else. Ask the question, how can this circumstance, person, situation, or skill significantly affect the outcome of what I am doing?
There was a wonderful book called, “If it ain’t broke, break it.” This book says that sometimes we need to turn the corner in order to create the turning point. We need to put on a parachute and jump out of the airplane. We need to seek out someone who can see it differently than we do. But it is always important to ask the question about what the turning point is so that we can create a model for ourselves.

Thomas Winninger – 612 896 1900 – Thomas@winninger.com – www.winninger.com


Key Business Technique – Develop A Market Intelligence System

January 23, 2009

Quality Information Yields Quality Decisions

Do you have products sitting in your business waiting for customers to come in to purchase, or do you have customers that come to you wanting to buy your products and services? In today’s price competitive environment, the successful business will be customer driven rather than product driven. They develop their product line and service menu first by testing them in the marketplace and then developing and broadening only as their information or intelligence system applies.

A Market Intelligence System employs various methods of collecting valuable data or information that enables you to forecast the direction of your market. The key is to be sure you are gathering quality information. Truly, the quality of information that you gather will dictate the quality and success of your decisions over time. Businesses do not fail because they don’t have good ideas; they fail because they make poor decisions based on a lack of information. A Market Intelligence System that is tailored to the size of your business helps you fulfill customers’ needs because it identifies their profiles, purchasing habits and motives and their wants and needs.

PRIMARY AND SECONDARY DATA
Starting a Market Intelligence System does not need to be difficult or expensive. The most important initial information that you need is primary data and that consists of names and addresses of your customers. Those can be obtained from customer checks or by having the customer fill out an information card and they are given a membership to your “Shoppers Club”. Primary data also includes what is purchased, how much, how often, when and specifically by whom. The source for this data comes right out of your cash register/computer system. Primary data is the basis for your Market Intelligence System.

Secondary data is the next level of information necessary for an effective system and comes from a variety of sources. Sales associates should be talking to each and every customer that comes into your business. Perish the thought that your sales team would merely be asking, “Can I help you?” It is so easy to gather information with open ended questions such as, “Will this be your first purchase or are you seeking to upgrade your current model?” or “Where do you think you will use this product most often?” to “What have you purchased previously and from whom?” Over time the information garnered from these types of questions will be valuable to your decisions regarding future inventories. Advisory boards and focus groups also are critical to providing the information you need.

IDENTIFY WHAT YOU WANT TO KNOW
Collecting data is important but knowing what you want from it and how you want to apply it is equally important to a successful Market Intelligence System. You must develop specific objective for the data you are collecting. Ultimately you want to own your customers’ buying cycle. How can you do that if you don’t possess the information that helps you determine buying motives? Are you collecting information based on customer wants and needs? Do you track inbound inquiry calls? When you have a customer call asking about an item that he says he’s not ready to buy yet, but will be soon, is that not critical information? Are you tracking the frequency of purchases and the average dollar amount? Granted, large ticket items are not purchased with the frequency of clothing or groceries, but frequent requests for a particular model or item may very well impact your inventory purchase decisions and influence critical changes in your product lines to serve premium customers. Customers who purchase an item above a certain dollar amount should automatically be given a “Be Back Coupon” and a personal thank you note.

If you are not retrieving information from a database that tracks timing on service for a piece of equipment, how can you tell your customer when to buy a new one? There comes a point when a discerning business owner will tell his customer that the purchase of a new piece of equipment will cost less than the continued service on an older model. That is putting a Market Intelligence System to work for you!

Is your database matching customer profiles with purchases? For example, if you notice that a customer or customers in a particular profile typically buys a certain item, and they start purchasing another item, are you offering that item to other customers with the same profile? It sounds complicated, but there are numerous inexpensive software systems that help. I personally recommend a client management system called ACT! It has a wide range of options that allow you to manage your database, establish callback schedules and maintain customer profiles.

I see too many business owners that think a Market Intelligence System consists merely of weekly cash reports. They can’t tell me what their best day was with a particular item over the last six weeks or what people are asking for when they call on the phone. The outstanding owner will know the answers to those questions because his Market Intelligence System has given him the data. It goes back to the quality of information you are gathering with each transaction or inquiry. The key to a successful Market Intelligence System is timely collection of relevant information and processing it quickly so it can be used to support your entire operation. It will help you shift your focus from merely what’s selling to who’s buying.

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.


Great Products or Great Costumers – How To Segment Your Market!

January 21, 2009

Business owners are faced with a variety of ways we can “sell the program”, meaning how we can focus on the process of getting our product or service into the hands of our clients, rather than the product or service itself. Concentrating on the benefits and how the product fits to the lifestyle of the user is “selling the program”.

Another way to sell the program is to focus on how our clients purchase. Americans are in love with their credit cards and a simple, hassle-free credit program will go a long way to selling the program at your business. Every day more and more people are stepping onto the information highway and making purchases through the Internet. Is your business up and running on the Web?

Another way value added merchants can sell the program is to provide service after the sale. This ties in perfectly with our focus in this article. Not every customer wants to be treated the same way. The huge amount of discretionary spending available in America today has caused us to get lazy. I see far too many independent business owners respond to this phenomenon by just putting more products on the floor. More products for more customers. Surely this will result in more sales, right? Perhaps for a short time, but in the long run, you will find that strategy will do nothing except sabotage your Maximum Value Perception and keep you from getting full price. What happens when the customers go away? You’ll be left with a lot of great products. I would much rather create a bank of great customers who will continue to come to me season after season, for all their purchase needs not just for products. To do this and to continue to build MVP, it is critical for us to know how to customize the Point of Transaction based on customer demand.

POINT OF TRANSACTION
The Point of Transaction deals with how your customer wants to do business with you. The environment of your business; the actual purchase system; the knowledge and support; and post transaction support are all factors that are perceived quite differently by different clients. You see it all the time on the car lots. Some people want to kick a dozen sets of tires, check under the hood, test the seats and nearly perform surgery before buying a car. Others know what color and style they want – if you have it – it’s a done deal.

CUSTOMER SEGMENTS
This incredibly strong market economy of today means a myriad of more people actually becoming customers. It is critical for the leading business owners to know how to segment their products and services to the different customer categories. Selling the Program in the almost any industry is vastly different than it was as little as five years ago. Not only are there countless more numbers of purchasers, there are countless numbers of more products to purchase. The offerings in the boating industry for example, include cheap small, expensive small, midsize, premium midsize, big and VERY BIG! Pleasure boating, once reserved for the wealthy is now accessible to a much wider array of people.

This rapidly expanding economy of ours can make segmentation quite complex. Adding to the challenge is the fact that the United States will become a non-majority country in which no single ethnic group will compose more than 50 percent of the population in the next 15 years. And within market segments there exists yet more sub- segments. For example, within heads of households, age 35- 50; white males may not be the only category. This group may now include single, college educated females as well. Obviously, all customers are not equal, differing in age, race, income, geographic location and sex. I still find that many businesses still fall short of properly targeting their goods and services to the different categories of customer demands. I find businesses whom spend a lot of time and money on large groups of customers who couldn’t care less about additional benefits in buying from their store, office or dealership. Not being able to discern the difference in these market segments will drain profits and eventually be losers for your bottom line. There are those who will come in your doors looking only for the fastest, sleekest looking boat you can show them. They care little about your Gold Label Service, they just want it BIG and they want it FAST. We must understand as well that there are overlaps in any segment and not everyone will fit exclusively in only one category. The Point of Transaction will not be exactly the same for each customer. My work has taught me that the best strategy for analyzing your customers within market segments and locating your premium customers is to place them into one of three categories: relationship, choice, or transaction. We will look first at recognizing a great relationship customer. In identifying relationship customers you will know the amount of demand and potential loyalty they have for your product and services. These are people who have the highest level of intensity and want service, information, and support after the sale. They will come in to look at a SUV for their family. They will look to your to help them determine which selection best fits their lifestyle. They will want you to have it delivered to their front door. They will want seasonal check-ups and want you to schedule it for them. They will spend more with you in the years to come. They recognize your MVP and are willing to pay full price for it. Relationship customers are premium – keep them the closest to you.

Thomas J. Winninger, CSP, CPAE, and member of the Speaker Hall of Fame is the president of Winninger Institute for Brand Strategy. Over 70 major companies in North America depend on him to assist them in maintaining their market dominance. The new millennium has seen the release of his newest book “Full Price!”. He is also the best selling author of “Price Wars” and “Sell Easy”. Contact the Winninger Institute at (612) 896-1900. E-mail: thomas@winninger.com; or visit our website


Don’t Use a Term If You Can’t Define It

January 19, 2009

I recently walked into an electronics retailer. They really sell a lot more than electronics, but that is their main niche. They are known all over the United States and have been very successful both from a service and a stock value standpoint. They have grown excessively in these past few years. Their international headquarters were actually just completed four blocks from my office. Their name is Best Buy.

Dick Scholtz, the founder of the company, is not only a successful businessman but also a role model to be emulated. He is one who believes that terms without definition are not actionable. In other words, don’t say you give great service if you can’t define what service is. Don’t tell me that you are Best Buy, if you can’t define it. Don’t tell me that you have great value if you can’t define what value means. Don’t tell me you’re a good friend, if can’t define what a good friend is. This involves defining it in terms of my value, not yours. Don’t tell me you’re a great father or partner, if you haven’t defined those either. For truly in the definition is the value you bring.

If your business has a great product and you haven’t defined it in terms of the highest need of your best customer then you are wasting time even talking about growing your business. If you are trying to be everything to everybody, and haven’t defined the differentiating needs of different customers you seek to serve, you won’t be successful.

If Domino’s is in the pizza delivery business, and did not define pizza delivery as within 30 minutes or it’s free, they wouldn’t be the leader in the pizza business today. Can you define your term? Can you make the definition so clear that everyone is attracted to what that means? Don’t use a term without a definition. The definition is the reason that people are attracted to your product, service, or talent. If you are a financial planner and have not defined what that means to the highest need of your best client then it will be very hard for you to be successful. The definition of the term is what makes it applicable, not the actual term.

Thomas Winninger – 612 896 1900 – Thomas@winninger.comwww.winninger.com


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