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Common Sense Business Solutions

The price of money

Money is not a commodity. By definition, a commodity is a generic product that is bought and sold on price alone. Money, Canadian bills for example, look the same, smell somewhat the same, and are available country wide. But, when you want to borrow money, rent the money in fact, the price for that money is not at all consistent.

Why does the price of money fluctuate from person to person? Why do some people borrow at prime minus rates and some at 18%? It is because, in part, that your lender does a risk assessment of you and your circumstances that affects what they will charge. Let’s look at this from the point of view of a mortgage for your home.

The first consideration is location. If your home is 100 kilometres from the nearest small town of 4000 people, you might not get a mortgage at all, but if you do, the lender will add risk factors. If you default, will anybody buy the property and redeem the mortgage? Your Shangri-La is perhaps too unique to attract a buyer.

Then there is the home price bracket to consider. A home priced to sell in a hot price bracket is easier to mortgage than a million dollar home. There are simply more buyers who equate to an easier exit from the loan in the event of default.

Then there is the loan to value calculation. A high ratio means only that you do not have enough “skin” in the game and if things get overwhelming it is too easy for you to walk away, leaving the lender with your house. A higher loan to value ratio simply means you will pay a higher interest rate or have to give up your first born child.

Then there is your employment. Self-employed or just started a new job? You will pay more for your money. That is because the risk of not being employed or having too little money coming in to service the mortgage is higher than having a nice steady government job.

Then there is your credit report. Credit is something to be managed. Keeping your record clean and current shows that you are fastidious about paying your obligations. Having a low score means you are a deadbeat.

All of the above explains why some people pay 2.5% and some 15% on their mortgages. It is, in part, a reflection of the supply and demand function.

 

This column focuses on business problems and how to solve them. Andrew Gregson, BA, MA , M.Sc.Econ is a mortgage broker, economist, and author.





Yard sale pricing

I have deliberately abridged this household tips article to illustrate pricing strategies. "Tips For Pricing Yard Sale Items” was written by Lynnette Walczak, and published in household-tips.thefuntimesguide.com

 

If you want to be smiling at the end of your yard sale and feel good that you’ve sold most of your items, then price everything very low! I’m not kidding.

[Left over inventory is a drag on your shelf space and should be liquidated, or returned to keep your retail store looking fresh.]

 

Price Tags vs Haggling

Unless someone is a seasoned yard sale shopper, most people aren’t all that comfortable “haggling” to get the best deal on a yard sale item.

[Know your customers – Canadians don’t like haggling.]

I’ve found that most shoppers would rather know what you’re asking for an item (thus, price tags or yard sale stickers are a necessity). And only about one-third of those will try to talk you down on the price. If you don’t have price tags (or table signs) on all of your items, then chances are the very shy people (or someone who is just mildly interested in an item) won’t ever speak up and ask you the price. People who might have bought, if they only saw a price tag on the item, will just quietly leave your sale instead.

[Don’t make it difficult for people to buy.]

Here’s a tip if you are trying to sell something that is fairly high dollar and it’s a popular item that appears in catalogs or sale ads. Cut out the ad with the item in it (with the price showing of course) and tape it to your item. I’ve seen this done mostly with gently used children’s toys and such. It shows the buyer that spending $10 for an item that normally sells for $40 new is a good deal. Be selective if you use this this tactic, people will get turned off if you do it for every item you’re trying to sell.

[Referencing another price from a competitor or an almost identical product builds trust that you know what you are doing.] 

 

Make An Offer… No Way!

Another thing I’ve learned firsthand: People don’t like to “make an offer”. They want to know what your starting bid is first, so they can offer something lower.

At my last yard sale, I had a bunch of collectibles (Michael Jordan stuff, Nolan Ryan stuff, old-timey memorabilia from Kool-Aid, Campbell’s Soup, etc.) and, despite the “Make an offer” signs prominently hung in front of these items, people repeatedly asked me, “How much do you want for this?”

My reply of, “Make me an offer” was never accepted. They would all balk and cringe and mumble something to the effect of: “I don’t want to make an offer… I want to know how much you want for it.”

[Answer – giving a price range works.]

Only one woman forced me on the issue. She talked me into starting the bidding process. And I guess she liked the price, because she jumped on it, without any hesitation. That was my fear… Since I’m not into collectibles, I wanted someone who was to start the bidding process. Because if I started, not knowing the item’s true value, I’d likely start it too low and get “taken.”

[Do your homework and if you have no idea start with a really high price and move down with the market.]

 

What Do You Do If Nothing Is Selling?

Half-way through your sale (if not sooner), you need to take a step back and assess the situation. If items are selling, then you probably don’t need to do anything differently. But if you’ve hardly sold anything — or you just want to blow-out the rest of the items that haven’t sold yet — then consider having a “1/2 Off Sale!” Or, if it’s late in the day, and you see someone looking at a particular item for a few minutes longer than most, yet they don’t buy it. Before they leave, offer that item to them at 1/2 price. Most of the people I’ve done this with will actually buy it at the lower price!

[Lesson? Be flexible. Not all customers are the same, with the same tastes or same pocketbook. What some people will happily buy is junk to someone else.]

 

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.



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.





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.



Read more Common Sense Business Solutions articles




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]









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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