Your Business Strategy

At the outset, there are some basic rules of pricing that we must discuss.  First, remember great-great-grandpa and grandma?  One thing about their business was always the same and it’s still the same today.  To stay in business you must take in more than you spend.  Subtract your cost of goods from your selling price, then subtract your operating expenses.  The money that’s left, if any, is your profit.  The formula applied to the traders who brought spices to Europe from the Orient, it applies to Home Depot and Best Buy, and it applies to your business too.

It’s one of the laws of nature, just like gravity.  It applies to every business.  It never fails.  If your selling price isn’t more than the total of your cost of goods and your expenses, you’re losing money.  Unless you have unlimited funds, you’ll soon go out of business.

However,the good news is that if you have less money at the end of the day than you started with, you have several choices for tomorrow.

1.  Sell more.

2.  Charge more.

3.  Buy at a lower price.

4.  Reduce your expenses.

So simple, yet so difficult.

Let’s go back to the first paragraph for a second.  Remember, this is a law of the universe.  There are no exceptions.  It applies to Wal*Mart, or whoever your particular "big box" competitor happens to be, just as surely as it does to you.

Sure, the chain stores may sell more than you do, but they also have higher, much higher, expenses.  What they don’t have is FLEXIBILITY.  You have a HUGE advantage over the big guys when it comes to responding to change.  We’ll talk more about that later.  For now, just keep in mind that bigger sales and bigger expenses go hand in hand and the grass isn’t always greener on the other side of the fence.

Something else to keep in mind, and this is very important:  Every potential customer is not looking for the lowest price.   "Always the low price" doesn’t move everyone.  Year-to-date through April, 2006, Mercedes Benz sales in the United States are up 15.9%. 

People fall into three categories when it comes to buying durable goods.  The first type likes to brag about their "deal".  Nobody can buy as well as they do and they love to talk about it.  "You’ll never guess what I paid for this (fill in the blank).  These are the bargain hunters.

People in the second group are the exact opposite.  They may not tell you what they spent, but you’d better believe they want everyone to know that they only buy the best, regardless of price.  They buy the Rolex watches and the Coach purses.  They’re willing to pay top dollar for prestige products. These are the luxury buyers.

Finally, the largest group falls in the middle.  They’re the value buyers.  They may not be able to afford the top of the line, but they want quality and service and, like the luxury buyers, they’re willing to pay for it.  They may buy their toothpaste and deodorant at Wal*Mart, but not their big stuff, IF you give them a good reason.

It’s up to you to decide which group of customers you want to go after.  If you go after the bargain hunter, be prepared to do battle every day.  You’ll have to beat every competitor’s price, even competitors who happen to be 1,000 miles away.  Here’s another law of the universe:  If you sell only on price, you will NEVER be the lowest.  There will always be somebody, somewhere, willing to sell for less.

If you choose the luxury buyer, be prepared to offer the best brands and the best service and don’t be afraid to charge accordingly.  You will not be able to target both the bargain hunters and the luxury buyers.  You can’t be all things to all people.

On the other hand, you CAN focus on the luxury buyer and the value shopper.  Let’s look at Mercedes Benz.  You can buy a C Class Mercedes for around $30,000.  Based on quality and resale that’s a good value.  But, if it’s luxury you want, they offer cars with prices well into six figures, including the SLR McLaren, which will set you back nearly $1/2 MILLION!  Obviously, you can serve the middle and the high end quite nicely.

Your retail strategy must match your pricing strategy.  You can’t charge luxury prices and give bargain basement service. 

Remember we said earlier that price – cost of goods – expenses = profit (or loss).  We also said that you will NEVER have the lowest price.  If you accept that premise, then you will agree that the difference between the lowest price and your price is the added value that you offer to the customer.  The customer must agree that the extra benefits of buying from you re worth the extra cost.

One Response

  1. […] a post that I wrote in 2006 on Your Business Strategy that you might find […]

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