Things I Learned on Vacation

There’s nothing like a trip to a place that’s heavily into tourism to validate the law of supply and demand.  For example, the price of a gallon of unleaded gasoline in Branson, MO is as much as 40 cents/gallon more than it is just 30 miles north in Ozark, MO. 

When people go on vacation, they seem to lose all consciousness about what things are supposed to cost.  Or maybe they just don’t care.  It’s only once a year and they’ll worry about the bills when they get home.  When was the last time you bought one of your kids a pop-gun or a hill-billy hat?  Under normal circumstances the answer is probably "never".  For that matter, most kids wouldn’t normally be caught dead in a hill-billy hat.  Yet you see kids and even some adults proudly sporting a pointy felt hat with a corn cob pipe sticking out of the side all over town when you’re on vacation.  You just know that hat will never again see the light of day once the wearer gets home.   The same  can be said about coon-skin caps, cowboy hats, and baseball caps with all kinds of odd sayings on them.  And, don’t forget the T-shirts.

If some band you’ve never heard of shows up in your town and charges $50 a ticket to see them, most normal folks will pass.  But the tourists line up to get those same $50 tickets to see that same unknown band and are happy to get in.  Don’t get me wrong.  There are some very good entertainers in Branson, people you have heard of and would gladly pay top dollar to see wherever they are.  But there are also some no-names who seem to do quite well.

Nobody in their right mind would pay $8.00 for a beer or $7.00 for a soda……unless they were at a Major League Baseball game.  Then, the sky’s the limit. 

The point is that value, like beauty, is in the eye of the beholder.  The retail value of anything is exactly what the customer is willing to pay, no more–no less.  And sometimes, price is no object, like when you’re on vacation.  But, it’s not just vacationers who make these decisions.  Every consumer does it every day.  Our job is to determine what that value is and price our merchandise accordingly.  Cost-plus pricing was fine in our grandparents, maybe even our parents, day.  But if you use it today you’re losing sales some of the time and leaving money on the table other times.

Some time back we did a series of posts on pricing.  If you missed them, or if you’d just like a refresher course, look for the "Categories" section in the right-hand column of this page and click on "Pricing".  If you have any suggestions or additions, please let us know.

By the way, is anyone interested in a slightly-used hillbilly hat or a pop gun?  If so, let me know.

More on Generation Y

In a recent post we discussed the members of Generation Y.  These are the sons and daughters of the Baby Boom generation, born between 1982 and 2000.  In an article called Gen Y sits on top of the food chain in today’s issue of USA Today, writer Jayne O’Donnell gives us more insight into this powerful demographic.

Online marketing expert Kelly Moony has researched this group and found some interesting things.  One is that they’re turned off by slow web sites, dismissive sales staff, and free shipping that’s too slow.  That’s probably true for most of us.  The difference is that these young people will express their unhappiness on their MySpace page, in Instant Messages, and on their blogs.  If you turn one of them off, you run the risk of alienating an entire generation.  She finds that they want merchandise that’s either cheap or elite, something that we’ve discussed here previously, too. 

Moony says that Y’s are more savvy than they’re given credit for and "in some instances they think they know more than the person selling them something."  I’d have to disagree slightly.  In some cases they do know more than the person selling them something.

Consumer psychologist Kit Yarrow is quoted as saying that these young consumers have an "equal vote in the look and style of the family."  No argument there.  My two "Y’s" definitely influenced my recent car purchase.  (My daughter has better taste than I do and my son knows more about cars.)

The bottom line is that this group of young people has money to spend now and will have a lot more to spend in years to come.  They know what they want and they know how to get information.  We’d better pay attention to them.

A $3,000 coffee maker?

Dacor_coffee
Have you ever seen a coffee maker that would set you back three grand?  Well, you have now.  That’s it on the left.  The Dacor CM24P built in coffee system.  According to the manufacturer’s web site,

" Only from Dacor will you find a plumbed coffee
system allowing for the consistent brewing of coffee without needing to
refill a water tank."

The unit’s built into the wall and brews "the perfect cup", one cup at a time.  It has an adjustable height dispenser allowing for taller travel mugs.  It has a digital display and customized brewing software.  It works with either ground coffee or with beans.

If a plain cup of coffee isn’t your cup of tea, "it Not only is it the perfect choice for coffee, the
versatile unit dispenses espresso, cappuccino as well as water for hot
tea or chocolate all from the touch of a button."

It has an "integrated frothing system" and built-in cup and saucer storage.

Don’t ever be afraid to offer your customers the top-of-the-line product.  Afraid they’ll have sticker shock?  Think about this.  The low-end Mr. Coffee sells for around $20.00.  At $2,900 the Dacor unit is 1,450 % higher.  But, don’t forget, it has a built-in frother.

Seriously, if you’re a coffee drinker, wouldn’t you really like to have one of these things?  I know I would.

 

Hunting for Treasure

Treasure_chest
In a recent series of posts on pricing, we discussed three types of consumers and the pricing strategies that appeal to each group.  In a new book, "Treasure Hunt: Inside the Mind of the New Consumer", Michael Silverstein, sr. vp of the Boston Consulting Group, discusses the growth of the low end and high end price categories, and the decline of the middle. 

According to Silverstein, where the US economy has traditionally been pictured as an egg shape, with a small top and bottom and a large middle, today the consumer economy is becoming more of an hour glass, with a large top and bottom and a shrinking center.  Interestingly, he says that the same customer is shopping at both ends of the scale.  The customer "in the middle" no longer buys everything in the middle.  Instead, they "trade down" on certain items so that they can afford to "trade up" on others.  He cites the example of a couple who might buy their groceries at a warehouse club and use the savings to buy a BMW.

In the post, "Your Business Strategy",  we discussed this principle briefly, but according to Silverstein, it’s more prevalent than we thought. 

So, what’s the bottom line?  What does it mean to our business?  It means that unless we want to dwell in the low margin, low price end of things, we must make our high end offerings attractive to this new "treasure hunter".  Silverstein cites the statistic that 75% of discretionary spending in the United States is controlled by women.  If we want Ms. Treasure Hunter to  "trade down" to warehouse club grocery shopping and lunch at McDonald’s so she can afford our latest and greatest, then  we’d better give her a good reason.

As suppliers, we must continue to provide you with innovative products at good price points and you, as retailers, must provide an attractive shopping environment, knowledgeable sales people, convenient shopping hours, and world-class service. 

Michael Silverstein writes a weekly consumer column that you can find here.

Coupons

Coupon_1
Seth Godin has an interesting post on
his blog today that fits nicely into our discussion on pricing.  The
subject is coupons.  He points out three benefits of coupons and two
warnings.  First the benefits.

Number one, a coupon allows you to offer different prices to different
customers. Maybe you’d like to offer a greater discount to customers who travel
a greater distance.  Zip code mailing lists would be one way to do
that.  Zoned advertising would be another. 

Number two is that "they provide the shopper with a totem."
Some customers view a coupon almost like a check.  They have to cash
it.  If they don’t buy, they lose something, the value of the coupon.

Number three, coupons create a feeling of urgency.  If I want to save (or
not lose) the value of the coupon, I have to buy before it expires. 

I would add two more benefits.  Coupons level the playing field.  You
don’t have to be a giant retailer to offer a coupon.  If you use email or
the Internet to distribute them, you have virtually no cost until they’re
redeemed.  Even if you use other media, the cost of the discount is only
incurred when the coupon is redeemed.  Occasionally you’ll give a discount
on a sale you would have gotten anyway, but most coupon sales will be
incremental business that you wouldn’t have gotten otherwise.

Finally, when a shopper walks into your store with a coupon you immediately
know two things.  One, she’s serious about buying.  She wouldn’t have
gone to the trouble to bring in the coupon if she wasn’t considering a
purchase.  Two, you know that price is important to her and can tailor you
presentation accordingly.

Godin’s two caveats?  Don’t do a coupon if you can’t execute it
properly.  In particular, don’t use coupons for high-end products.
If you’re selling to the luxury buyer, a coupon sends the entirely wrong
message.  Even the value shopper may be put off if the coupon isn’t
presented properly.  Finally, "if you make the use of the coupon a
hassle, you’ve blown it."  If there are exceptions, state them
clearly.  If there’s an expiration date (which there almost always should
be), make it very clear.  Spending money to bring a customer into your
store and then making them mad is not a good use of advertising/marketing
dollars.

 

Variable Pricing

Last time, we mentioned competing with the “big box” stores. To do that effectively, you have to master the concept of variable pricing. Variable pricing means that you don’t apply the same gross profit percentage to everything you sell. It’s how the big boxes set their prices and if you’re going to compete with them, you’re going to have to use it too.


The average big box store carries thousands, even tens of thousands of items. Out of this huge assortment, there are a few hundred items that are highly price sensitive. They’re the ones that you and I, as consumers, are most familiar with. They’re things we buy often and we have a pretty good idea of their price. For example, we all use 100 watt frosted white light bulbs. As a general rule, they cost around $1.25 to $1.50 each in multiple packs. They may be 2 for $2.99, or 4 for $5.00, but they’re going to be somewhere in that neighborhood.


By comparison, a 150 watt bulb will set you back something closer to $2.75 – $3.00 each. Why? Does it cost twice as much to produce a bulb that gives off 50% more light? No, they cost twice as much because we’re not sure how much they’re supposed to cost. We assume that if the store is competitive on the prices that we know, they must be  competitive on the prices that we don’t know.

It’s all in the customer’s perception. If you happen to sell light bulbs and your price on the 100 watt soft white is $2.50, you’d better believe the knowledgeable customer is going to be sure that your price is twice as high on everything else.


So, how do you use variable pricing to your advantage? First, make a list of the items that you sell that you suspect fall into the price sensitive category. Then take your list to your big box competitors, all of them. What are they charging? If you find a big variation, you know that the item isn’t price sensitive. If they’re all charging about the same, you’ve found what you’re looking for.


Now, you have two choices. Beat the chains at their own game by pricing the items close to their price. Notice I didn’t say lower than their price. You don’t have to be lower. You don’t even have to be the same. You just have to be close. Normally you can get away with a price difference of about 10%. The typical value shopper will pay that much for the convenience of avoiding the big parking lots and long lines at the chain store.


Your second choice is to not carry the item. Offer the customer better alternatives. If you choose door number two, you still need to know what the big guys are charging for the price sensitive item and have a story to tell your customer explaining why your item is better and worth the additional cost.


As we mentioned before, every retailer no matter how big or how small has to cover expenses. Every item can’t be a loss leader. According to their most recent annual report, Home Depot’s overall gross margin for last year was 33.5%. That means that for every dollar of sales at 10%, there had to be another dollar of sales at 57%. It’s important that you understand this principle yourself. Don’t buy into the story that the big guys are always cheaper on every item. It’s just not true.


There’s another important thing about variable pricing. Remember that shopping list? Keep it handy because you need to repeat this process often, at least monthly. Something may change. You have to be aware of what your competition is doing all the time.  They’re checking on you.


Two friends of mine used to be in the retail gift business. They sold figurines and knick knacks and assorted dust catchers. They had a very simple pricing strategy. Whatever they paid for something, they doubled it. It was a simple system.  There was no complicated math.  They knew what they were making every time they sold something.  And, horror of horrors, they didn’t care if their customers knew it.  It worked for them because their competitors all did the same thing.

Then Cracker Barrel came to town. If you aren’t familiar with Cracker Barrel, it’s a chain of restaurants with gift shops. Or maybe it’s a chain of gift shops with restaurants. Either way, they sell a lot of gifts. You almost always have to wait for a table in the restaurant and you spend your waiting time in the store. Brilliant! These two ladies were convinced that Cracker Barrel was going to put them out of business because of their low prices.


Don’t ask me how, but I know for a fact that Cracker Barrel’s margins range from the single digits to well over 50%. Given the difference in product lines and the fact that my friends sold a lot of exclusive lines, they shouldn’t have even considered CB a competitor.

To summarize variable pricing:

You have to know what your competition is charging for a limited number of price sensitive items. If you sell the same items, you must be competitive which means priced no more than 10-15% higher than they are or you shouldn’t carry the item at all. You don’t have to charge the same price.

Price the rest of your merchandise at your normal margins.

Repeat the process often to make sure you remain competitive.

Remember that even the big guys have to make a profit. You may actually beat their price on less price sensitive merchandise.

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.

 

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.

It’s All About the Prices

I don’t know about you, but if I want to see my kids roll their eyes, all I have to do is mention the way things used to be. Somehow, I don’t think they believe that I walked to school through waist-deep snow, year-round, five miles, uphill, both ways. We all want our kids’ lives to be better than ours were, and in most important ways, they probably are. But, you can’t blame us if we exaggerate just a little bit sometimes.

But, everything isn’t better in the twenty-first century. Some things are actually more difficult; maybe much more difficult, which brings me to the topic of setting prices. Many of you responded to a Tacony Corporation survey that this is a topic of great concern, as well it should be. The price you charge for your merchandise will make or break your business. If your prices are too low, you won’t be able to cover your expenses and you’ll go out of business. If your prices are too high, you won’t sell anything and you’ll go out of business. It’s critical that you get this part of your business right.

Setting prices is something that is much more difficult today than it was in the “good old days.” Consider great-great grandpa (and grandma) who ran the town general store. They were the original “mom and pop” business. They were the owners and the employees. If they had anyone else on the payroll, it might have been a kid who came in after school to sweep up and stock the shelves. Chances are that “employee” was your great grandpa.

There was no competition. If you wanted to buy a sack of flour, or a shovel, or a pair of overalls, you went to the general store. The price was what great-great grandpa said it was. Not that your worthy ancestor was out to gouge the public, after all, in those days, people navigated by a moral compass. But, he knew that he could charge a fair price, enough to pay the bills and provide a living for himself and the missus. The traveling salesmen who called on him kept him up-to-date on what merchants in other towns were charging.

As time went by, the general store got competition. Everyone got the Sears and Montgomery Ward catalogs, so they had a better idea of what a shovel should cost. People started traveling to Capital City to shop and they would brag to their neighbors about what a good deal they got. But, there was still a value for convenience and local stores continued to make a reasonable profit.

Slowly, but surely, the amount of competition has ratcheted up. Chains like J. C. Penney and Western Auto began to open in small towns. Kroger and A & P were just two of the national grocery chains that started showing up all over the country. Pricing, while still not rocket science, was getting harder.

As great grandpa and great grandma, then grandpa and grandma took over the family business, one of two things happened. Either the business grew and prospered or it shrank and eventually disappeared. Don’t forget that Sam and Helen Walton’s 5 & 10 cent store in Bentonville ,AR became the biggest retailer in the world. Sam had this strange idea that if you lowered prices, even in small towns, you would make more sales and more profits. It was (and still is) all about the prices.

Of course his idea was a success and Wal*Marts started sprouting up all over the south and Midwest, eventually going national and now even international. For the independent retailer, pricing became even more of a challenge.

This brings us to today. Wal*Mart is just one of many obstacles we face in remaining competitive. With the advent of the Internet, every consumer becomes an “expert.” Now, instead of a local market, we all operate in a world market. As a consumer, I can find the lowest price for an item, not just in my town, but in the entire world.

Type the phrase “digital camera” into Froogle (Google’s shopping service) and you get more than 1.3 million hits. “Sewing machine” returns more than 31,000 and “vacuum cleaner” returns almost 27,000. There’s no doubt, in the twenty-first century, the consumer has the power. If we’re going to compete, we’d better be on our toes.

Over the next few days, we’ll be discussing both the art and the science of retail pricing. How do we arrive at a price that’s fair for the consumer and that allows us to make a fair profit? We’ll look at questions like:

What is your retail strategy?

What is your pricing strategy?

Do they go together?

Stay tuned.