Powerful Pricing to Help You Make It BIG This Year!
One Price? It’s The Wrong Price!
Today I went to look at automobiles. I need a new motor car - and as I looked, I asked “the price”. Without exception, all the sales reps replied “for that model, you should be thinking in the mid twenties ..., or the mid thirties ...”
So, what was the price? Well, it all depends! Of course. It always depends.
Test yourself. Think of a very popular product in your product line - one that makes you a lot of money. What is the price?
If you answered with a single figure, the price you mentioned was wrong. Not that it would be wrong all the time, but it is the wrong price much of the time. The days of setting a price as “the price” are now over. You might not agree, that is your privilege, but time will convince you. After you’ve lost a lot of sales.
Take another example. Plan a visit to Hong Kong. Check hotel rates. For the Eaton Hotel, in Nathan Road, Kowloon, (just a random selection from the web) the rates given are:
• 30 Mar to 31 Mar (1 night) - $HK1,450.00
• 31 Mar to 03 Apr (3 nights) - $HK1,800.00, and,
• 03 Apr to 06 Apr (3 nights) - $HK1,550.00 - all plus tax.
Same room, same visit, but three different prices.
I was inspecting a newly refurbished hotel room in Australia, and I asked (silly me!) “What’s the rate?” “It all depends” was the answer, so I replied, “Yes I know, but what’s the ‘rack rate’?” I was told in no uncertain manner that there isn’t any longer such a thing as ‘rack rate”, but that today there are at least seven prices, and that is before any special contract prices are included.
From automobiles to accommodation, multiple prices rule.
In “OfficeWorks” the other day, a woman was complaining. She wanted a particular ink cartridge. It was listed at $79. Last week it was listed at $59. Same store, same cartridge. Wrong week!
Examples just keep pouring out of real life retail. All in the name of maximising the return. You can ignore it, but that’s not wise. Really!
So how does it work?, and how can you apply it to your business? Read On!
The Right Price is The Highest Price You Can Get.
You probably think that’s obvious. In one sense it is, but you’d be surprised at how many people find this part hard.
If you take the traditional accounting view (Memo all Accountants: The Red Zebra takes the economist's view, and if you want to satisfy your honour, we’ll have to set a date for the shootout!), well, if you do take the traditional accounting view, you probably think that price has something to do with “cost”. It does - it’s just that that “something” is very little to do with “cost”.
After all what is “cost”? Do you mean the FIS price of goods you buy, or the fully absorbed cost of those goods? Does your idea of cost include the holding cost of the items you’ve bought? Which of these different amounts is the “cost” in your mind?
It’s even worse if there is labour involved, or if you include a manufacturing process.
So to say you are basing your pricing on your costs, is not really very accurate - is it? What now?
Truth to tell, the price is the best price you can get at the time of sale, and that depends absolutely on the value the customer (shop visitor really, they’re not yet a “customer’, are they?) puts on what you are selling. Only the sales person at the time of selling really knows this, and since most sales staff are not professionally trained as salespeople, it’s hard to trust them to make the decision anyway.
Here’s an idea! Set a range of prices, show the highest on the shelf card, and give some discretion to move inside the nominated price range to get the sale. Now that is something that works! And if you have the right systems, it increases sales and increases profits. But you do need the right systems! Like “The Eaton Hotel”, and “OfficeWorks”.
Get The Systems in Place - or Stay in the 20th Century!
Seriously, a full description of the principles involved in all of this is way beyond the scope of “Management Memos”. It’d take a month to explain. On the other hand, if you don't follow the majors into more modern pricing techniques, you'll remain doing what you learnt about last century. But don’t worry!
Everything you need to implement a powerful, highly effective, and profitable pricing regime that will keep your competitors guessing, is available for you at The Red Zebra Business Centre. Of course it takes time and money to implement this kind of change. But suppose you are a relatively small retailer running at $750,000 turnover. Increasing your effective gross margin by just 2 points will increase your bank balance by $15,000, even if there is no increase in sales. Don’t you think that might be worth a look?
Now, An Apology!
To ring in the New Year, we published a case study on pricing. It was a real case study based on real people in a real business. Unfortunately, there was a problem with the link to read the solution. All been fixed now. Click Here to see the response of The Red Zebra. What? You missed the Case Study? Click Here to read it now!
- "MANAGEMENT MEMOS" ENDS -
Any advice, information or comment contained in this document is general in nature, and should not be relied on as the basis for any specific commercial, business, employment, or financial decision. Specific advice should always be obtained for each individual circumstance. Accordingly any advice, information or comment contained herein is for general guidance only.