Value Pricing

OK, we’ve talked about your retail strategy and how it
affects your pricing strategy. Now you’re
probably thinking, “That’s all well and good, but what the heck should I charge
my customers for my products?” That’s an
excellent question. The answer is, “It
depends.” Nobody said this was going to
be easy.

 Let’s try to be a little more specific. For the sake of discussion, we’ll assume that
you’ve decided to go after the “value shopper.” We’ll call the pricing strategy for this customer “value pricing.” The principles that apply to value pricing
apply just as well to bargain pricing and luxury pricing.

 Much of the following information is taken from “Pricing
Your Products”
, a publication of the U.S. Small Business Administration. Here are a few of their suggestions.

 Suggested retail price. Most manufacturers provide “suggested retail prices.” Many retailers use this MSRP as a guideline.
Depending on your industry, this may be a viable price, or it may not. It has the advantage of being easy to use. One of its disadvantages is that the price
is set for all dealers in every market. It doesn’t take local variables into consideration.

 Competitive pricing. This is a strategy where you price your merchandise based on your
competition. If you’re a supermarket
selling two liter bottles of Coke, your price had better be very close to the
competition or you won’t sell much Coke. You may not sell a lot of anything else either if your customers use the
price of Coca Cola as a yardstick to measure your overall pricing. If store A
is at 89 cents and you’re at $1.09, they may presume that you’re 22% higher on
everything.

But if you’re not a supermarket your merchandise may not be
as highly visible as the world’s best selling soft drink and your prices won’t
get the same attention. But, and this is
important, customers do compare prices on everything, especially over the
internet. As we discussed, with a value
pricing strategy you don’t have to match the competition. You do have to be aware of the competition
and have a story to tell that justifies your difference in price.

 Pricing below the competition. You’ve seen the ads, maybe you’ve run them
yourself, saying “We’ll beat any competitor’s price.” This is very hard to do and the net result is
usually that you and the competitor end up making less profit.

 Pricing above the competition. With a value pricing strategy, this is
probably where you’ll want to be most of the time. You execute this strategy by offering more
and better service than your competitors. You may be asking, “Won’t this raise my operating costs?” Possibly, but if you can raise your costs by
5% and charge a 10-15% higher price, isn’t it worth it?

 Some components of better service have a cost attached to
them, some don’t. Keeping up to date on
the latest developments in your industry may require you to spend some time in
reading trade magazines and surfing the web, but they don’t add much to your
cost of doing business. Smiling and
greeting your customer by name when they come into your store (and training
your staff to do the same) doesn’t cost anything.

 Giving your customer a free loaner when their item is in the
shop (when appropriate) has a minimal cost, gives you a huge advantage over
many of your competitors, and might just result in a sale.

 Having a few  toys in an area set aside for your
customer’s kids to play while mom shops costs very little, but may make the
difference between a sale and no sale.

 You know the specifics of your business better than we do. The point is that you have to treat your
customer so many different ways that she has to like one of them. And, every little thing you do to make the
customer’s shopping and buying experience more pleasant, more convenient, more
interesting to talk about gives you permission to add a little bit to your
selling price.

 In a recent post we talked about Starbucks. How is it that they can charge $5.00 for a
frappe/latte/cappuccino/whatever when McDonalds charges about a buck for a cup
of coffee? It’s simple. You can have the comfy chairs, soft music,
free wireless internet, free newspapers and the overall atmosphere of Starbucks
or you can sit in a plastic booth and be surrounded by noisy kids at McDonald’s. It’s your choice. Your business is no different.

 “Great, but you still haven’t told me how much to charge for
my stuff.” Finally, here’s something you
can use. Start with your competiton, all
of it. Shop the local stores including
the big boxes if they carry what you carry. Don’t just shop your brands. Shop
them all. Check out froogle and other
online shopping sites. You’re looking
for the bottom. What’s the cheapest
price the customer can pay for my products or something similar? Don’t forget to add freight and handling if
you’re looking at a web retailer.

 Next, take an honest look at your own operation. Make a list of all the things you offer that
the competition doesn’t. Is it
impressive? Great! Item by item, assign a dollar value. If you offer free delivery, what’s it
worth? If you offer in-home service,
what’s it worth? If you teach your
customers how to use your product, what’s that worth? No false modesty here. You’re looking to establish a value. Be honest. If you were a customer, would you buy from yourself? How much more would you pay?

Walk outside your store.  Come back in looking through the eyes of a potential customer.  Is this a place where you’d want to shop?  Is it attractive?  Is it clean?  Would some new carpet or a coat of paint make it a nicer place to shop?  If so, it’s money well spent.

 I live two blocks from a True Value hardware store. I live two miles from Home Depot. If the True Value store carries an item, I
buy it from them. Why?  For one thing, I can always find someone to
help me, and I need it. They will walk
me through a project, tell me what I need, and help me find it.  Second, if I forget something, it’s a lot
easier to go back two blocks than to go two miles. Third, the price difference is usually very
small. Sometimes, the hardware store is
actually cheaper.

 The bottom line (and that’s what we’re really talking about,
isn’t it?) is this: When a customer buys
something, they’re buying a total package.
If they want the cheapest possible price and don’t care about service,
speed, or convenience, they’re probably not your customer. They’re going to Wal*Mart or to the
Internet.

 Your ideal, value shopping customer wants more and is
willing to pay for it.

 Next time, we’ll talk about how you can actually beat the
chain stores at their own game.

 

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