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Common Sense Business Solutions

Squaring the circle

I have been reading about market segmentation and choice. Howard Moskowitz’s research into tomato sauce as retold by Malcom Gladwell on the TED talks (http://www.ted.com/talks/malcolm_gladwell_on_spaghetti_sauce?language=en ), led to a big increase in sales by Prego. The company added new varieties to its lineup of sauces – chunky, garlicky, mushroom, and saw a big jump in sales. Moskowitz’s conclusion was that consumers are not one great monolithic entity with one taste in tomato sauce. Therefore, the company needed to offer more varieties and in so doing dug deep into the market.

But merely offering lots of choice leads to lower sales. In Terry O’Reilly’s CBC Radio programme, Under the Influence, (http://www.cbc.ca/radio/undertheinfluence/limited-edition-brands-1.3021076) Terry recounted a test marketing of jam. When consumers were offered dozens of varieties and even inducements, like coupons, sales were still less than where consumers were offered limited choice. It seems that our human brain cannot cope with too much choice. Too much choice causes us to walk away shaking our heads.

How can we square the circle of too much choice simultaneously increasing sales and killing sales?

The companies that have been successful in adding choice already have a market presence. Reebok introduced its soft leather dance shoe in 1982, but gradually offered tennis shoes, basketball and then children’s shoes. There was a time lag as Reebok built its brand and consumer awareness of the benefits of supple leather footwear. Introduced all at once to the market, it could have been hard to sell a monolithic idea to a splintered group of people with altogether different needs and tastes. We are not all the same and so we all do not need the same product.

So how is it done? First create a presence in the market for one product or service that is the best or suits your target market the best. Dominate your market. Like the pub in the sitcom, Cheers, Everyone Knows Your Name. This is brand creation. Offer limited choice in that product or service. If you are offering more than three or four choices, trim. Only when you have some significant market share (you are measuring your market penetration, right?) can you start slowly adding other related versions to the original idea. Even after marketing leather shoes to dancers, Reebok is still best known for… running shoes.

 

About the Author:

Andrew Gregson published his book Pricing Strategies for Small Business in 2008. The book is now available in Europe, India, Russia and the United States. Andrew holds a Master’s degree in Economics from the London School of Economics. He writes a column for Castanet.net, and is a guest speaker to industry and trade groups. Andrew has owned businesses and franchises; worked as a business consultant, and now works in finance in Kelowna, British Columbia, wine country. You can contact Andrew through his website www.pricingstrategies.ca.



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Calling on your help!

  • Has the internet flattened prices as predicted?
  • Has the internet created opportunities for your business to find higher priced markets further afield?
  • Is posting prices on your website a good thing or not?
  • Are price aggregators like Travelocity a good thing for you as a consumer? Or for you as a business?

We have not seen the full power of the internet deployed yet, but since its inception and use as a business tool, pundits have predicted that it would be a juggernaut that flattens prices and margins everywhere; that it would homogenize all similar businesses, lowering margins and making it a buyers’ paradise. The cynics among us fear that small businesses will disappear and be replaced by huge faceless conglomerates selling “average” goods and services.

But has it happened? My guess is that for some it has already happened to them. On the other hand, for most businesses, they enjoy the internet as a source of suppliers. For catalogue driven industries, the internet is a boon with the ability to change prices on the fly and change pictures and offerings at will with almost no cost. The internet has not been kind to printers.

For some, the internet has worked in the opposite way. A specialty book shop in England has found a niche selling rare and high priced books at better margins because its marketplace is now the world and the bidding wars more vigorous.

And in India, the use of cell phones by fishermen (taking a liberty here to include phones with the internet) has allowed them to check the best market prices in several ports before they land their catch.

The oil and gas companies post their requests for price and quote on websites, but only the pre-qualified can bid.

Some companies, like Home Depot, post their prices on the web. They deal in commodities that are easily compared. One Black and Decker sander is like another, right? Does the consumer benefit? Does this encourage low price providers or are they able better to capitalize on impulse buying in their huge brick and mortar stores?

If you post your prices, the pricing robots will find you. We have all researched the cost of a flight or hotel for a vacation. Doing it one by one is tedious – there is a lot of choice – and when you fully give in and buy, your poolside chair is always beside someone who paid less or got a room with a view. So the aggregators like Travelocity should be helping you as a consumer. But if you are a hotel owner, has it helped to fill otherwise vacant rooms or has it depressed prices?

For those buyers for whom free is too expensive, the internet must be a boon. For the majority of us looking for that right combination of value and price, can the internet replace a knowledgeable salesperson? Are there lessons to be learned from the auto industry? Their websites are the second port of call after a few test drives. Their sites give the value but the price is negotiated in the showroom with a salesperson.

Finally, if you have been reading my columns, you will know that I will always push to get value on the table before mentioning price. This is not possible with a pricing bot. They read numbers and not reviews. So you still have homework to do unless you take a chance like Captain Obvious does.

The purpose of today's article is to encourage a response from as many business owners as possible. This information will be compiled for the benefit of Software Advice which company publishes primary research on pricing and software. This link will take you to a research piece on retail pricing. http://www.softwareadvice.com/retail/industryview/pricing-strategies-report-2015/

 

Andrew Gregson published his book Pricing Strategies for Small Business in 2008. The book is now available in Europe, India, Russia and the United States. Andrew holds a Master’s degree in Economics from the London School of Economics. He writes a column for Castanet.net, and is a guest speaker to industry and trade groups. Andrew has owned businesses and franchises; worked as a business consultant, and now works in finance in Kelowna, British Columbia, wine country. You can contact Andrew through his website www.pricingstrategies.ca.



Buyers are liars

Do you have a minute? There’s something I’ve got to get off my chest. Can we keep it just between you and me? Yes? OK – here it is.

Buyers are liars.

There. I’ve said it. Buyers are liars. Maybe it’s the purchasing tactics that an organization uses to drive a bargain. Maybe it’s simply what an individual does to look good to the boss. Whatever the reason, purchasing at many businesses can push the boundaries of truth well past the level of absurdity.

You know you believe me. After all, how often have you heard one, more, or all of these lines? 

“You guys are the highest priced player in the market.”  Right. As if that one isn’t completely transparent. You’ve probably already got a pretty good idea what your competitors charge. If you’re the highest priced player, odds are it’s because you’re a premium product, or you’ve chosen that approach as part of your overall sales strategy. Remarkably, we’ve heard this line even when two companies control 80%-90% of the market, with little if any price differentiation.

“Switching costs nothing.”  Your customer wants you to think you need them far more than they need you. But you buy products and services, too. You know full well that switching vendors always carries some level of cost, risk and pain. That’s the real reason behind the threat. It’s much easier to bluster than it is to actually make a change.

“You are 10% too high to get this deal.”  It’s the purchasing equivalent of the auto salesman saying, “Tell me what you can afford, and I’ll see what I can do.” Give in, and you’ll never regain control over the sales process. Purchasers will go to absurd lengths to make this lie stick – right down to fake quotes from competitors, or even fake POs to competitors “accidentally” being sent to you instead. 

“You are selling a commodity. It’s exactly the same as everybody else’s.”  Outside of products traded on an electronic commodities exchange, every vendor should be bringing some degree of value add to the process. It might be the range of guarantee, freight and delivery expertise, brand recognition, technical know-how, or customer service. That’s what attracted the purchaser to you in the first place. It’s amazing how often someone thinks you’re special, only to insist you’re not, once there’s actual money on the table.

So, what’s an honest, hard working company to do, in the face of such perfidy? Over the last century, tens, if not hundreds, of books have been written about effective negotiation tactics. In the best-selling book Getting to Yes, Roger Fisher and William L. Ury offer five key propositions for a principled negotiation: 

  • Separate the people from the problem
  • Focus on interests, not positions
  • Invent options for mutual gain
  • Insist on using objective criteria
  • Know your BATNA (Best Alternative To Negotiated Agreement)

In addition to the tried and tested techniques offered by Fisher and Ury, and the always critical building of two-way trusted relationships with your buyers, we must step into buyer negotiations armed with the right information. In our experience, the following five techniques are quite effective at cutting through the baloney. 

1. Acknowledge the truth:  Buyers, do, indeed, lie from time to time. Even if they’re good people. Even if they’re your friends. It’s part of the process. It’s nothing personal.

2. Use your information:  With the right database tools and analytics systems, you can regain the initiative. When a customer claims that they should get a discount because “we always pay on time,” you’ll know immediately if that claim is true, or if they’re actually habitually 15 days past due.

3. Call their bluff:  A modest investment in Web-scraping and other tools can help your staff uncover publicly available information on competitive offerings and pricing. There’s not much room for argument when you’re clearly the better-informed party.

4. Drive the conversation in the right direction:  When a customer throws out something that sounds outrageous, ask the questions that force them to produce quality answers. It will rapidly become clear if they’re telling the truth.

5. Always offer them value:  Provide a valuable, differentiated offering with excellent service to back it up, and maniacally focus on maintaining or growing the gap between you and your competitors. With a sharp focus on staying ahead, it will be much easier to turn around buyer negotiations.  

 

Re-purposed from an article by the Kini Group. 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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How to price: Step Five

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 fourth article and the following final article 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 5: Marketing environment

In 1991, CBS’s 60 Minutes program ran an episode about the French Paradox. In that segment, they tried to explain the low incidence of heart disease in France where everyone ate lots of fatty foods (butter, cream, cheese). The solution to this conundrum, the investigators claimed, was that the French drank red wine and put forth a scientific sounding explanation.

The French wine exporters pounced on this and ran full page ads in US newspapers crowing about the positive health impact of a glass of red a day. Sales soared. Prices rose. As similar pattern emerged when oat bran, yoghurt, alkaline water, and echinacea were highlighted as health givers.

In February of 2015, Terry Reilly, of the CBC radio show Under the Influence aired a tremendously insightful examination of the impact of weather on sales. http://www.cbc.ca/radio/undertheinfluence/sunny-with-a-chance-of-mouse-traps-how-weather-affects-marketing-1.2957608?autoplay=true. In this episode, O’Reilly describes how the people behind the Weather Network convinced Campbell Soup to exploit a small bump in chicken noodle soup sales when the weather turned rotten. Instead of just letting it happen, the weather network fed information to Campbell’s to enable them to advertise chicken noodle soup heavily three days before bad weather hit and made people miserable. The result? A tremendous bump in sales.

Consider the price of champagne. Champagne is fizzy white wine, when all is said and done. It costs marginally more to make but sells for a significantly higher price. Why? Because the manufacturers have convinced us all that a meaningful celebration of life, success, marriage, sometimes divorce, graduation, birth and any Hallmark holiday can only be celebrated properly with a bottle of bubbly.

These are three instances of a marketing environment affecting price. In the first, an accidental but favourable review was pounced upon to drive sales and prices. In the second instance, data mining was used to exploit a changing mood and bump sales, although not in this instance, price. In the third instance, the manufacturers set out from the beginning to convince us to pay more for their market segmented, highly differentiated, USP driven product.

So the final part of your workbook must be to include these marketing environments that influence your pricing. What do you control? What can you influence? What factors put you in the driver’s seat? Even the tiniest thing can make you master of your universe and the price driver in your market place.

 

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.



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.intentfinancials.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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