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Common Sense Business Solutions

How to price: Step Three

In 2008 Self Counsel Press published my book - Pricing Strategies for Small Business. The purpose of the book was to make available to the owners of small companies, pricing techniques used by sophisticated and large companies to improve their bottom line. Since that time I have discovered that most owners are largely indifferent to the opportunities presented by better pricing. The focus after the past seven years of terrible economic times is still on cost cutting and growing sales at whatever cost, ignoring a truly powerful business tool. I believe that finding the time to experiment with pricing is almost always beyond business owners struggling with sales, staff, regulations and taxes.

The question most asked of me when I have given speeches on pricing is how to price their product or service. Clearly this is beyond the scope of a quick 10 second review. But demonstrating six or eight different methods in use today was clearly not quite enough.

So the purpose of this third article (see previous articles here) and the following two articles is to create the five steps to finding your price using a workbook approach. The steps in this workbook format are: know your competitor pricing, define your USP, know your customer, price and demand relationships, and the marketing environment.

 

Step 3: Know Your Customer

Successful businesses know with exactness the wants, wishes and buying behaviours of specific individuals. They have analyzed the size of the market or the number of potential customers that fit the target profile. But further still, they know their customers’ names, ages, genders, incomes, home and Internet addresses, professions, education, associations, and marital status, number of children, hobbies, their tastes and interests. They grasp what their customers watch, read and hear. They understand their likes and dislikes. Knowing a customer to this depth is one of the key characteristics of highly successful business leaders.

But for most business owners, their target market is as faceless as a telephone book and their marketing efforts as effective as phoning everyone under the letter P.

For the purpose of creating a pricing strategy we need at least two pieces of key information. First is income of the target market and obviously, the geographic distribution of these people. Then you will need to know what benefit they get from buying your product or service and how do these fit with education level, age group, and hobbies.

Put simply, if your target market area is overwhelmingly lower income blue collar, you might do well with a used auto parts store but not a mag wheel retailer. If your target market is higher income professional people who like woodworking, you might do well with a tool store or a lumber store stocking exotic woods.

Even knowing what your customer is going to undertake with your product or service can point you to higher profits. As a wily business owner, you must know what BENEFIT your customer is trying to solve by buying your product or service.

If the product is a chop saw and the weekend warrior is in your store, the salesperson’s first question has to be “what project are you planning?” If the project is a small cabinet, the cheapest machine will be satisfactory. But if the customer is making his living with the chop saw, a durable, reliable machine is the ticket.

If your market is upwardly mobile, there might be an element of keeping up with the Joneses or one-upmanship in the market. More highly priced products carry a cachet of being more successful – if you position yourself by your marketing and branding. When Tynan water got its signature blue glass bottles on a Bond film, sales rocketed in a category crowded with high priced water.

So, create a table of what you and your sales staff think is the customer profile using the list above as a starting point. List all characteristic and then start ranking them in importance. Then pull statistical information from Stats Canada and Chamber sources about your area. To fine tune this process, collect information on your customers. I am still astonished how few businesses collect even elementary data like phone number and email addresses. With social media you can keep your company in front of customers and potential customers, constantly testing the waters with products offerings and sales.

When you have finished, test, test , test and then start again. This is work, but is directly related to sales and sales growth. As above, this is a habit of a successful businessman.

In two weeks, Step Four focuses on demand for related products.

 

I owe a huge thanks to Rafi Mohammed for his insight and attempt to create a structure based on the theory of pricing. This column focuses on business problems and how to solve them. Andrew Gregson, BA, MA , M.Sc.Econ is an economist, author and a Senior Partner in iNTENT Financial Inc, a Kelowna based finance and consulting company. The three partners specialize in finance, pre-determined profitability, sales and marketing. If you need further information, please contact us through the website at www.intentfinancial.com.





How to price: Step Two

In 2008 Self Counsel Press published my book - Pricing Strategies for Small Business. The purpose of the book was to make available to the owners of small companies, pricing techniques used by sophisticated and large companies to improve their bottom line. Since that time I have discovered that most owners are largely indifferent to the opportunities presented by better pricing. The focus after the past seven years of terrible economic times is still on cost cutting and growing sales at whatever cost, ignoring a truly powerful business tool. I believe that finding the time to experiment with pricing is almost always beyond business owners struggling with sales, staff, regulations and taxes.

The question most asked of me when I have given speeches on pricing is how to price their product or service. Clearly this is beyond the scope of a quick 10 second review. But demonstrating six or eight different methods in use today is clearly not quite enough.

So the purpose of this second article (see first article here) and the following three articles is to create the five steps to finding your price using a workbook approach. The steps in this workbook format are: know your competitor pricing, define your USP, know your customer, price and demand relationships, and the marketing environment.

 

Step 2: Define your Unique Selling Proposition (USP).

Your USP is a sentence or phrase that explains what makes you special. It gives your prospective customers a reason to do business with you rather than your competitors. A good USP makes your marketing a lot more effective, because it gives you dominance over a market niche.

When developing your USP, it is important that you put yourself in your prospects’ position. Look at your product or service from the point of view of someone thinking about buying it. What is important to your potential customer? Focus on the benefits - your customers’ interest is what your product or service does for them. How does using your product solve a problem? The key to unlocking the decision to buy is offering benefits that outweigh what the competition offers.

So benefits are all about how your product adds value for your customer, while features relate to what goes into making the product or service and how it is delivered to customers. This is an important distinction, because customers are really not interested in features, they are only motivated by benefits.

For example, saying that there is a lifetime guarantee on your products is describing a feature. The benefit is that customers don’t take any risk by buying your product. A powerful USP is one that is focused on benefits that only you offer.

So, to start with, list all the features of the product or service that your business offers. When you can’t think of any more, go through each feature and look at it from the customer’s point of view. What is the benefit? List all the benefits next to the corresponding features. Next refer to your notes from Step 1 and list what your competition offers.

Your USP must be focused on benefits that only you offer. So, eliminate from your list all benefits that your competition is also offering. If you find that you have no benefits left after you do this, you will have to tweak some features so that they result in unique benefits.

You should end up with a few benefits to choose from. When deciding which one is the most suitable as the focus of your USP, ask these questions:

  • Which benefits are the most important to your client?
  • Which benefits are the most difficult for your competitors to imitate?
  • Which benefits can be most easily understood by customers?

If, like most of us, you are in a competitive market, you can’t be all things to all people. In other words, you have to find a niche - a corner of the market that you can take ownership of because of the unique benefits you offer. Remember, focus is the name of the game.

When you have identified the benefits you want to use, you can start writing the USP. Start off with a paragraph that describes the unique benefit or package of benefits. Then eliminate all unnecessary words. Cut it down until you have only one sentence that says it all.

A good USP should be:

  • Only one sentence.
  • Clearly written so that everyone can understand it.
  • Composed of benefits that are unique to your company or product.

The Domino’s Pizza USP is a good example of a Unique Selling Proposition that does all of these things:

"Fresh, hot pizza delivered to your door in thirty minutes or less, guaranteed."

When you have a USP, make sure that it is incorporated in all your communications to potential customers. Also ensure that it is well understood by your whole team and consistently delivered on. You will attract a strong following of loyal customers and your business will thrive.

In two weeks, Step 3 focuses on your customers.

 

I owe a huge thanks to Rafi Mohammed for his insight and attempt to create a structure based on the theory of pricing.

This column focuses on business problems and how to solve them. Andrew Gregson, BA, MA , M.Sc.Econ is an economist, author and a Senior Partner in iNTENT Financial Inc, a Kelowna based finance and consulting company. The three partners specialize in finance, pre-determined profitability, sales and marketing. If you need further information, please contact us through the website at www.intentfinancial.com.



How to price: workbook approach

In 2008 Self Counsel Press published my book - Pricing Strategies for Small Business. The book is now available in Europe, India, Russia and the United States. The purpose of the book was to make available to the owners of small companies, pricing techniques used by sophisticated and large companies to improve their bottom line. Since that time I have discovered that most owners are largely indifferent to the opportunities presented by better pricing. The focus after the past seven years of terrible economic times is still on cost cutting and growing sales at whatever cost, ignoring a truly powerful business tool. I believe that finding the time to experiment with pricing is almost always beyond business owners struggling with sales, staff, regulations and taxes.

The question most asked of me when I have given speeches on pricing is how to price their product or service. Clearly this is beyond the scope of a quick 10 second review. But demonstrating six or eight different methods in use today is clearly not quite enough.

So the purpose of this article and the following four articles is creating the five steps to finding your price using a workbook approach. This is not a silver bullet any more than creating a great sales program is a silver bullet. It takes time and effort and needs reviewing annually to keep it effective.

The steps in this workbook format are: know your competitor pricing, define your USP, know your customer, price and demand relationships, and the marketing environment.

 

Step 1: Competitor pricing.

What do your competitors charge for the identical or near identical product or service? You need to know this because your industry is always in the grip of its dumbest competitor. If competitors are driving down prices, customers will make the unfortunate assumption that your higher product or service is also low quality and not deserving of the higher prices. Having high prices and only high prices proves that your competitors are right.

Knowing ALL of your competitors is key and the steps to make a comparison will make you more aware of where you fit in the pecking order. Are you in the middle, top or bottom band in the pricing marketplace? Are your products and service easily comparable? Is it easy for customers to compare apples to apples?

Let me tell you why this important by quoting from my own book and experience. When I owned a hardware store, we started selling repair parts for barbecues. The suppliers told me that my competition was Canadian Tire and Home Hardware who sold inferior universal replacement parts and not Original Equipment from the Manufacturer. It was part of my spring routine for several years to price shop my competition to see what they had in stock and what they charged. Since the burners for a barbecue sold in the middle 1990’s for some 20-30% of the original value of the barbecue, there was sticker shock nearly every time. I watched the reaction to the sticker shock and was able to quote from my research that whereas I had the OEM replacement part, my competitors across town had a suitable universal replacement that only required “some” assembly and it was $1.50 less. I could see the mental calculator going. “A little assembly is what the barbecue itself was supposed to need and it took me a whole Saturday afternoon and a case of beer.” I never lost a sale because of my higher price.

If your product or service is totally identical to your competitors, please note that in your research. You will need that information for Step 2 which will appear in two weeks.

 

I owe a huge thanks to Rafi Mohammed for his insight and attempt to create a structure based on the theory of pricing.

This column focuses on business problems and how to solve them. Andrew Gregson, BA, MA , M.Sc.Econ is an economist, author and a Senior Partner in iNTENT Financial Inc, a Kelowna based finance and consulting company. The 3 partners specialise in finance, pre-determined profitability, sales and marketing. If you need further information, please contact us through the website at www.intentfinancial.com.





One of the giants

The vast majority of what I have written on pricing and pricing strategy is drawn from my business owner and consulting experience. But when I wrote my book Pricing Strategies for Small Business in 2008, I had to re-visit my academic roots as an economics student at the London School of Economics.

In September of 2014, Ronald Harry Coase died. I had read a number of books and articles quoting and referring to him while at the school - all about the application of economics in companies, but I never realized his major contribution to understanding how companies work.

Coase is best known for one article in particular: "The Nature of the Firm" (1937), which introduces the concept of transaction costs to explain the nature and limits of firms. It was, to paraphrase Coase, a contribution on the theory of economic systems so obvious that it tended to be overlooked.

What Coase realized in observing US auto manufacturers, was that the existence of the firm compensated for a critical flaw in the price-setting mechanism. Transaction costs, like the need to draw up or negotiate contracts, prevent the price mechanism from working smoothly. Firms existed where it was easier and cheaper to co-ordinate activity within a centrally planned organization as opposed to spelling out the details for every step in the production process.

So, companies exist to spread the costs of price setting and writing contracts for hundreds of variables by bringing them under the umbrella of a single company. Think of the costs of having to buy each piece of lumber to build your house, or each screw and panel for your car?

Why is this important today? In the Okanagan, for example a VERY high proportion of people are self-employed, working from coffee shops and basement offices. I know a number of them. When I chatted to them about why they got into business, many told me that the company they worked for or got work done for them charged many dollars per hour and they could do it for less. That is true.

But 4 factors are consistently missing from their calculations.

  1. Negotiating a price each time is, well, time consuming and that time is unpaid.
  2. All the time hunting for business is unpaid time.
  3. Preparing a contract is unpaid time, and a contract may just lead to a flat NO!
  4. There are no medical and dental benefits.

So the reality Coase found in his research in 1937 still applies. Without companies, the entire costs are on the shoulders of the entrepreneur and woe betide the business owner who does not get his sums right.

 

This column focuses on business problems and how to solve them. Andrew Gregson, BA, MA , M.Sc.Econ is an economist, author and a Senior Partner in iNTENT Financial Inc, a Kelowna based finance and consulting company. The 4 partners specialise in finance, pre-determined profitability, sales and marketing. If you need further information, please contact us through the website at www.intentfinancial.com.



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About the Author

Andrew Gregson, BA, MA, M.Sc. (Econ), holds a Master's Degree in Economics from the London School of Economics.

Andrew's experience working with an international business consultancy and being a business owner for 15 years was the impetus for his book "Pricing Strategies for Small Businesses". He brings his expertise in finance, pricing and debt restructuring to the table to help struggling manufacturing and service companies to return to profitability. This has helped companies to rebuild value and often to sell at much higher dollar values.

Andrew has contributed to trade journals, "Spark" on CBC National Radio and has been a guest speaker at business networking groups, colleges, universities on his topics of expertise - pricing, exit plans and debt. He is also a frequent contributor to blogs and online postings for business help.

Andrew is currently the President, Board Of Directors intent Financial Inc., his role is overseeing intent Financial Inc., Intent Investment Corporation and other related ventures.

 

Website link:  www.intentfinancial.com

Contact e-mail address:   [email protected]






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The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet presents its columns "as is" and does not warrant the contents.


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