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Common Sense Business Solutions

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.



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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.



How small business handles money

Canada's SMEs prefer to manage their finances in-house, according to our survey of 727 companies

Canadian business owners have a do-it-yourself approach to financial management, according to the latest installment of the American Express Small Business Monitor.

Fully 92% of the 727 owners surveyed (each of whom employs fewer than 100 people) believed they could speak adequately to their businesses’ finances. While 71% said they handle their own bookkeeping, 95% deal with budgeting and forecasting in-house, and 79% handle their own payroll work.

Managing finances internally is not necessarily a drain on employees’ time, with 50% of respondents saying they spend less than five hours a week on it and only 9% taking more than 15 hours weekly.

 

Read: 8 Simple Ways to Improve Your Cash Flow

The one area that remains tricky for many Canadian firms is taxation—only 55% of the businesses polled do their own taxes in-house. At the same time, taxes were ranked the most challenging aspect of business finance by nearly one-fifth of respondents, with the same number rating cash-flow management as most difficult.

Technology is key to respondents’ financial management: 33% use software that makes the process simple; 11% turn to websites to learn the basics.

Small businesses are remaining positive, despite the slow economic recovery. Sixty-three percent are “hopeful” about their firms’ financial future, and 52% said they saw a slight or significant improvement during the last quarter. However, companies are continuing to take a cautious approach, with 66% willing to take only moderate risks, versus just 6% prepared to attempt significant risks.

Here are other key findings of the AMEX Monitor, co-produced by PROFIT and Canadian Business.

This infographic and article is from the November 2014 issue of Canadian Business and Profit

 

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 specialize 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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Reflecting on the end of the year

The importance of the end of the year and the Christmas holidays is profound. It is a time to reconnect with family and traditions that have made us who we are. But the year-end has always been a time for me to take stock and plan. Did I get where I wanted to go in 2014? What could I have done better? What will I do better in 2015? Are my goals realistic? How will I cope with growing older?

We have a choice to be a pessimist and cry into our eggnog (don’t do that, the tears will dilute it), endlessly replaying the Mobius memory strip of things we cannot change. Or we can move on, having taken aboard that we survived and learned from yet another setback. That is called a stiff upper lip and was a much regarded virtue in Victorian times. The Victorians built a dynamic world, full of possibilities and they grasped them fully. We can do the same.

Quoting Viktor E. Frankl, Man's Search for Meaning

“The pessimist resembles a man who observes with fear and sadness that his wall calendar, from which he daily tears a sheet, grows thinner with each passing day. On the other hand, the person who attacks the problems of life actively is like a man who removes each successive leaf from his calendar and files it neatly and carefully away with its predecessors, after first having jotted down a few diary notes on the back. He can reflect with pride and joy on all the richness set down in these notes, on all the life he has already lived to the fullest. What will it matter to him if he notices that he is growing old? Has he any reason to envy the young people whom he sees, or wax nostalgic over his own lost youth? What reasons has he to envy a young person? For the possibilities that a young person has, the future which is in store for him?

'No, thank you,' he will think. 'Instead of possibilities, I have realities in my past, not only the reality of work done and of love loved, but of sufferings bravely suffered. These sufferings are even the things of which I am most proud, although these are things which cannot inspire envy.' "

 

So, I urge you to have a brave Christmas and a brave new year. We can accomplish a lot. Our predecessors did.

Happy Christmas to everyone and I wish you a prosperous 2015.

 

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.



Read more Common Sense Business Solutions articles

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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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