Lessons in pricing strategies for small business
The President’s healthcare reform is the tsunami of change that has been long overdue. By the way, having spent nineteen years in medical manufacturing and distribution, the person who started the “movement” was actually Hillary Clinton. Hillary’s famous comments about reforming the industry sent a jolt of fear that rippled through the industry for years. Mrs. Clinton’s declaration started a seismic change and even though she was prevented from continuing her crusade, the industry underwent sobering changes and began to focus heavily on prices they pay for goods and services. Here’s a real scenario that took place a few days after Hillary’s speech. I met with an executive in charge of vendor relations for the second largest hospital distribution company in the US. My company manufactured products that competed with the world's largest medical company. At some point in the conversation I said “I’m sure you've heard Mrs. Clinton a few days ago. As you know our products are identical to X and can be sold at 50% savings. How can we grow our business with your company”? To my complete amazement he replied “If you want to grow with us, you’ll need to raise your prices. My salesmen will not push a product that has low commissions”. You see, the issue wasn't the distributor’s gross profit. It was the same percentage but lower in dollars. The answer revealed the root-cause of what is ailing the industry: grossly over inflated pricing that starts with manufacturers and ends with bedside delivery of a $100 Tylenol pill. Some of the reasons had to do with point-of-care inefficiencies and reimbursements but the main reason was the underlying assumption that the medical industry “ couldn't be touched”. After all, if you’re sick you have to get healthy.
So what can we learn from the medical industry about pricing?: Here’s a question: If you make a part for $3, should you charge $32? Should we as consumers be outraged if we knew the profit margin of items?
Business owners have a “right” to charge whatever they wish. Consumers have a “right” to buy from you, or go elsewhere. That is the essence of a free economic system and what is at the core of “what the market will bear” pricing strategy: the price that customers are willing to pay in your “market”.
How do you find the “market price” for your product or service? Are there certain industries that are immune from the process? (The medical industry thought so but the party is over).
If you’re a bar or lounge, it is not uncommon to pay $5 for a beer. We know that the profit margin on liquor is very high (“one glass of wine pays for the bottle”). But, we go out and willingly pay the price. In this case, what we’re paying for is “value” not a product; the opportunity to enjoy a nice meal with friends or family and have "fun".
Before you “set” a price, make sure you have an accurate “cost” structure: your fixed and variable costs of running the business (burden rate), and a line-by-line accounting of what it “costs” to make a product or deliver a service. Then, a comprehensive competitive analysis of what others charge and the price /discount variations that they offer. You should be aware of “published” pricing but also any "deals", promotions, discounts and most importantly the fine-print.
Setting the final price should follow two important guidelines: Is it in accordance with your mission and the financial goals of the company?. If you want to be perceived as a high quality supplier, your pricing must be set accordingly. If the company is struggling or you want to achieve significant growth, should you trade for higher volume and lower profits?
As profit is the lifeblood of any business, I would discourage any strategies that reduce (or even eliminate) profits. Also, bear in mind that it is incredibly difficult to tell customers that their price is going up.
- I always believed in the old saying “bulls make money, bears make money, pigs get slaughtered”. Stay away from “let’s see what we can get away with” pricing. Trust me; if you think you’re getting away with something, you’re not. For every customer's complaint, there is deafening silence from those who chose to do business with someone else.
- Never give your customers a reason to leave. Your product or service must deliver “VALUE”, consistently! Stay connected with your customers and they will let you know when your competitor has dropped their price. Then, read #1 above.
- If you’re in a highly competitive market, use a pricing strategy that doesn't dilute your value and profit. If you can’t compete, work on finding ways to reduce your costs and become more efficient.
- If your price is working, don’t mess with it. Find ways to up-sell by adding more value.
- Above all else, remember that price should be the least important reason why customers buy from you. If you develop customer loyalty, it will shield you from price fluctuations. If you take your customers for granted, only blame yourself when panic sets in and you find that only lowering prices will bring them back. It won’t.