Since the beginning of
recorded time, the cost of something (to the buyer) has equaled value plus price.
For the seller, establishing a cost has also been the cause of much discussion,
some violent arguments and even a few wars.
Now, we
are more civilized (theoretically) and our battles are fought in showrooms, the
print media and on the web. While the battles may be bloodless, the action and
desire for success is just as intense.
Victory, by
our definition, means that you are charging prices for your goods and services
that allow you to prosper, grow and provide a better future for you and yours.
Anything less than that means eventual defeat or years of drudgery and discouragement.
In today's highly competitive environment however,
the perplexing question is; where is the dividing line between charging too much
and not enough? As we delve into that question, you will discover that the division
between too much and not enough is not a thin line. The division between too much
and not enough is actually a broad expanse that allows plenty of room for profitable
maneuver.
Pricing As A
Strategy
Perhaps the most difficult concept for an entrepreneur
to understand is that pricing is only a tactic, not a strategy. By itself, pricing
alone will never make you profitable or successful. Pricing is only one component
of an entire inventory of needed tools that allows you to successfully compete.
This bedrock concept is so important that it definitely
bears further examination.
In business or war (both
are similar), strategy defines your overall game plan of using your total resources
to accomplish your goals. Tactics are the specific tools, working together, that
make your strategy successful.
This may sound like
just a theoretical discussion. It is not! Understanding that pricing, by itself,
is only a tactic will make the difference between you becoming very profitable
and successful, just barely making it year after year, or totally failing.
The awards business is highly personal and personalized. Unlike
a department store, almost every single item sold has been customized. Unlike
a grocery store, very few of the items bought are necessities. Unlike a party
store, the goods bought are used (given) after the fact of an event, not before.
Unlike an art gallery, what you see does not have to be what you get. It can be
changed hundreds of ways, to suit the customer.
In
addition, when a customer comes into your showroom, 99.99% of the time they want
something. There is very little "window shopping" in the awards world. Now with
all of these facts do you really think that the only factor that is going to make
a sale is your prices?
If you think that, then pricing
is a strategy for you and you will probably never be as successful as you could
have been. Why? Because since human nature nearly always infects those type of
thinkers with the "low price" and "bargaining price" disease and they are constantly
giving their profits away.
Don't misunderstand me,
there is nothing wrong with reasonable prices (high or low) but it must be based
on more than just making a sale. The pressure is understandable. If you don't
sell enough products, you can't stay in business.
However,
if your prices don't reflect the perceived value and costs of what you sell, you
will find yourself on a vicious treadmill. You will find yourself forever constantly
selling, producing and worrying, but not really profiting all that much.
Elements
of Successful Pricing
Smart (profitable and growing) dealers
understand these basic truths of pricing:
First, successful
pricing tactics depends more upon the customer's perceived value of what they
offer than it does upon the dealer's actual costs. Bluntly, a junky look commands
one price and an elegant look commands another.
Second,
one third of the world considers price first and two thirds don't. Offering what
the other two thirds want (and pricing accordingly) means less work and more profit.
In fact, if offered well, the other one third may decide the prices are reasonable
anyway.
Third, the appearances of what you offer commands
better prices. Plaques that have been on the wall so long they have faded, trophies
with old dates, desk name plates and acrylics with fingerprints all over them,
engraved black brass that is almost brown with oxidation, and broken or damaged
anything on display, is going to impress no one.
Fourth,
the display environment affects perceived value and prices. Windows that are never
washed and shelves that you could write your name on and dust bunnies congregating
in the corners, give showrooms a very seedy appearance. There is a reason why
car lots are always washing their cars and sweeping their lots.
Fifth,
they display a wide assortment of options (not necessarily a million different
items) in their showrooms, each priced according to perceived value. Again, bluntly,
they know that customers will pay more for some options, even if it doesn't cost
the dealer anymore. They unashamedly do this because they know that, in spite
of their best efforts, they are not going to have a profitably successful day,
every day.
Sixth, they attempt to make major portions
of their showroom look different from the look of their competitors. When customers
don't see exactly the same look, they don't expect to see exactly the same prices.
Seventh, that the cost of materials is only used as
a baseline to adjust prices, not as a figure to be multiplied times a hypothetical
"pricing formula" multiplicand
Lastly, (but by no means
least) really smart dealers realize the supreme importance of superior sales skills
and understanding the psychology of their customers.
The
awards business is somewhat unique in the small business world. It requires artistic,
technical, manufacturing, sales and pure business skills. Not many professions
require that many skills to be successful.
Once a dealer
understands that it is the improvement and application of these skills that builds
a solid future, they are ready to be a serious competitor and get out of the "low-ball
price" rat race, by adding perceived value to their awards, that customers will
pay for.
The Strategy of Profitable
Pricing
As we continue this article we are making two assumptions.
First, you want to make more profit. Second, you see yourself as a professional,
who wants to build their future.
It does not matter
if you are part-time, full time, new or experienced or operate out of a showroom,
garage or on the web. If making a good profit is not your objective, then you
need to reconsider your status. You just have a time consuming hobby.
Oddly enough, many newcomers and experienced pros have trouble
with pricing for the same reasons (albeit from opposite ends of the tunnel). On
one end, the newcomer is reluctant to charge the same prices as the pro because
of fear that they won't make sales.
On the other end,
the pro is reluctant to "rock the boat" and raise prices each year for fear they
will lose sales to the newcomer. The pro also has to fight what we call "comfort
level stagnation," but more about that later.
This
primary concern of both groups is both right and wrong! Right, in that if all
they compete on is price, that is the only major difference. Wrong, in that if
they concentrate on the two-thirds of the world that considers other factors more
important they will sell more and prosper.
If there
is a secret to strategic (and profitable) pricing, it is this: "The entire package
of what you offer and how you present it, is what allows profitable pricing."
There is also a corollary to this statement. Put the right package together and
you can make it very difficult for your competitors to compete with you.
About now, you may be thinking, "this is all fine and good,
but how does this relate to me?" Every day and in every way.
Keeping
A Profitable Price
The concept of "package pricing" and
"high value presentation" is easily explained and understood if you agree that
your customer could care less about your cost of materials, labor or fixed overhead,
but you still have to make a profit to survive.
If
you agree with the statement (and if you don't, you live in a different world
from the rest of us) then the concept is simple. Customers (and you, when you
are a customer) will willingly pay more if they feel what is offered is worth
more. If they feel like value is worth less, they want to pay less.
Yes,
they want a good deal, no, they don't have much money, yes, they might get it
cheaper somewhere else, no, they don't want to pay more than last year, yes, they
want a discount, yadda, yadda, yadda. The point is not what a customer says, but
rather what they do.
Over reacting to a customer's
price negotiating tactic is the quickest way to lose profit. The obvious is immediately
caving in and giving a discount. Less obvious, is immediately becoming defensive.
Like a shark smelling blood in the water, the customer can easily decide you are
defending high prices and their dorsal fin will rise.
Trying
to get something for nothing is an American past time. It is almost as common
as "hello, how are you," and can be answered and dealt with just as quickly. If
you present a perceived high value package of benefits, product and presentation
the customer will still buy, regardless of what they say they want. Not all, but
way more than enough to let you profit. You just need to work on handling price
objections relaxed and natural.
Old or new, the average
dealer loses ten times more profit by giving it away (either with low sticker
price or discounts) than they ever do from lost sales because of high prices.
The first step to being profitable is to establish
prices that will allow you to grow and prosper and then: don't give it away! A
simple rule that all of us violate too much.
Establishing
Prices, Based On Perceived Value
"Charge what something
looks like it is worth." This statement, attributed to the late Ray Dodge (whom
many consider to be one of the founders of the modern awards industry) is as true
today as it was 60 years ago.
Showroom awards dealers
have an easy task in adding perceived value to their products. The only question
is if they will take the time to do it.
$50 worth of
cleaning materials, a gallon of paint, a container of potpourri and a few hours
of elbow grease, will make any showroom shine and smell like a new car. Clean,
fresh and exciting adds value in a customer's mind. It does in yours too, why
do you think they would be any different?
Now take
another weekend and replace (or at least clean and repair) every old, old looking,
outdated, dirty, damaged, dull and worn product in your showroom. When switching
plates, make totally new layouts. Add new and creative design elements that you
can do, but don't usually display. You can easily charge extra for design elements,
even if you don't raise general prices.
New and new
looking, adds perceived value. Only old looking antiques have a high-perceived
value.
Want to make 10-15% more money (all profit)
on your trophy sales? First, learn what columns your best competitors within five
miles use. Second, order a full complement of new columns (that you like) that
no one else is using.
Rebuild every "column" type trophy,
using all new parts. Switch out all plastic parts (they really do fade quickly)
on "non-column" type awards. Letter every trophy plate. Yes, it is a lot of work,
but since nobody does that, it will make you really stand out (and be talked about).
When you make up your new price stickers (and prices),
use the smallest one you can write on and put it on the top back of the base,
not on the plate. Again, you have added perceived value by appearance (and because
you don't look like everybody else).
You won't lose
money on the old columns. Keep one old trophy of each column out in a corner of
your showroom. Don't change the sticker, look or even dust them. Just letter a
small sign that says "closeouts."
Some of your "coupon
clippers" will buy the closeouts because of price and the rest of your customers
will buy the new trophies because of higher perceived value.
Speaking
of signs, don't forget to display a lot of small promotional signs to add value
and increase profitable sales. For example, displaying a small sign that says
"Clock Plaques are a much appreciated and useful recognition award," may make
your customer decide a $100 clock plaque is a better value than a $30 plain plaque.
It's all about perception. Winning the price game is
not about having the lowest prices. It is about a state of mind (yours and the
customer's) that understands that you must profit if you are to build a future,
and the best way to do that is to sell perceived value, not price.
If
you think the perception of high value can only be controlled in a showroom, you
are wrong. We know of quite a few "home business" award entrepreneurs earning
very good five figure incomes because of their "packaging and presentation" skills.
You don't know many because they are interested in profitable business, not "bragging
rights."
Without exception they are all skilled with
their production processes, creative in their work and persistent in their attitude.
Most have good people skills, present what the customer wants and is likely to
buy (rather than what they want to produce) and charge about the same (or sometimes
higher) prices than their "store-front" counterparts.
Their
extra value "package pricing" includes more flexible hours, delivery, personal
appointments, a strong empathy with customer needs, guarantees of on-time orders,
etc.
Even high value presentation is not overlooked.
One entrepreneur carries all of her samples in an expensive leather sample case.
All of her plaque samples are boxed and other items are either in blue velvet
pouches or wrapped in velvet. Everything is first class (even the so-called "cheap
stuff") in appearance and presentation.
No matter how
you operate your awards business, if you offer a great package of perceived value,
customers will want it, and you can charge accordingly.
Baseline
Pricing
The most basic question of new and experienced dealers
is what can (or should) I charge? There is no "magic formula" that applies to
all products and dealers. There are some useful guidelines for new and experienced
dealers.
The absolute best pricing guide for new dealers
is in knowing what the top, experienced dealers in their area are charging. The
key words are "top" and "area."
The top dealers are
successful by the only yardstick that counts. They are making money! The group
under them is making a living and the bottom half is barely making it, period.
Which makes the most sense to you? Should you pattern
yourself after success or failure?
What is going on
in your area is also very important. While it is good to listen to the ideas and
experiences of dealer's 500 miles away from you, local factors have more influence
on pricing.
For example, if there are 10 companies
offering jewelry engraving in a small city, pricing may be very competitive (and
low). If you are the only one within 20 square miles offering that service you
can charge much better prices (you are worth it).
At
our suggestion, one of our customers doubled their jewelry engraving prices. Over
an eight-month period they lost 10% of their customers but gained 80% in profits.
That's a nice trade.
Are we advocating gouging customers?
Certainly not. However, we are firmly stating that if you are a skilled professional,
and not charging for the value of what you offer, you are doing you and yours
no favors.
If you are an unskilled amateur, with no
thoughts for the future, that has a value too: low.
Experienced
dealers have the same challenges in the pricing game, but from a different perspective.
While you are the most likely to establish profitable prices on your products
and services, you are the least likely to change them.
Why?
Because of the human nature of enjoying living in the business "comfort zone."
The subconscious rationales for the "zone" are: "it's working, don't change it"
and the worse "I can't change prices, there is too much competition."
Sadly, the average dealer would probably rather get a tooth
pulled than sit down and figure out how they could improve their value package
and get better prices.
The feeling is understandable.
Your company is established, everyone knows you and you know everyone, your profits
provide a steady income, ABC League comes in every year, XYZ Company buys the
same order year after year and your future looks solid, although not spectacular.
Burn this in your mind. Every year that you don't change
prices, you are losing money, even if your sales are up. You earned the money,
you just didn't collect it.
We certainly don't recommend
you just immediately, and without thought, raise prices. We do urge you to cast
an evil eye towards your entire pricing structure. There well may be a lot of
room for adjustments.
We suggest you concentrate on
the largest sub-group of products that makes you the most profit (cherry finish
plaques, walnut plaques, badges and signs, whatever). A small increase there will
affect your bottom line faster than anything else.
Successfully
raising prices is all about justification, in the customer's mind. If they feel
like they are getting better, or more, or different, they will come a lot closer
to accepting a price increase than just being told "expenses are higher." That
will be true, but they don't care about that.
Probably
the easiest way to do this is to change your look. Move things around in your
showroom, refurbish your most important sub-group of products, and change the
price sticker look and location.
The idea is simple.
Subconsciously, newer looking and different always looks like it is worth more.
Old and familiar feels like it should still be the same price.
The
other important area to review is repeat orders, for regular customers who get
the same thing every year. This is especially important if they are one of your
top 25 customers.
We know it is difficult to raise
prices with many regular customers and we are certainly not suggesting that you
blow them out the door, with a price hike. We are just suggesting that you review
their past orders (before they come in the door) and decide if and how a price
adjustment should be made.
This can be done creatively.
For example, one dealer got a nice "raise" by getting one price stubborn customer
to agree to ordering 9x12 cherry finish plaques, with sublimated gold plates instead
of his usual 8x10 walnut plaques, with engraved black brass
The
dealer was creative. He made up a complete sample plaque, very artistically laid-out
and made that sucker shine. When the customer came in to place his order (60+
plaques) the dealer put it in his hands and waited for comment.
When
the customer said, "Wow," the dealer casually stated that in appreciation of past
business he was offering the larger and more elegant plaque at the same price.
The customer immediately agreed, but wanted to know what the price would be next
time.
Even more casually, the dealer said he didn't
think there would be even a 5% difference the next year and added, "and that's
not bad is it?" The customer agreed and they completed the transaction.
This was very good psychology. The dealer added perceived value,
laid the groundwork for a price increase the next year and made some nice extra
money from the difference in materials cost.
Obviously,
this method won't work with everyone. However, if you don't figure out a way to
make systematic price changes with regulars, then each year you are doing the
same amount of work, for less money.
Winning the pricing
game has never been about the sticker price on "things." It has always been about
offering a value package that customers want and will pay for.
When
you do that, you will grow and prosper. If you don't, then you will be forever
on a treadmill.
We will leave you with Alpha Supply
Company's "Three Golden Rules." Rule #1 - Make Money! Rule #2 - Have Fun! Rule
#3 - If you are not doing at least one of the two, do something else!
Back Library
Contents