I am NOT Maverick Marketing Sydney

Squeezed between rampant discounts and the increasing pressure brought to bear from rising costs and price sensitive buyers, CEOs around the world are focused on pricing strategy more than ever before.

With the exception of mandatory items such as utilities and food, prices have largely stayed stagnant because consumers demand it and competition forces it.

Australia has fared better than many markets, but ask most retailers and they’ll tell you that retail, even in the lucky country, is hard.

This isn’t to say, of course, that executives are oblivious to the problem.

Universally, they stand united, scratching their heads, trying to figure out how prices can be increased without damaging there market share or driving away too many customers.

Some companies are getting creative, loss leading on some products to pick up a stronger margin from another. There are others running around-the-clock promotions and discounts, so much so that recent research shows that the average Aussie shopper is sick to death of relentless sales.

Then there are the cheats; those that con the consumer into thinking there is a discount where none applies. The Good Guys got caught out by Channel 7, labeling goods on sale where those goods were in fact not being discounted at all and then there was the uproar about the supermarkets giving the impression of discounts where none applied.

Before you tamper with pricing, you need to understand the effect that pricing has on your gross profit margin. You can calculate your gross profit margin using this simple tool.

Sometimes you can make greater profit by selling goods at a higher price, albeit in less volume, than you would make if you discounted your goods.

One of the most important decisions you’ll make regarding pricing strategy is whether you sell to many people for lower profit or fewer people for higher profit.

Then it’s a matter of choosing the best strategy you can adopt to execute your goals.

In this economic climate, that’s about:

• Focusing pricing strategy around repeat business  (offering a discount off a retail price hurts more than offering a discount when a customer buys a second time) and
• Making the decision whether you want your prices to be easy or hard to compare with your competitors (and promote or disguise them accordingly).

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Have you ever used an online coupon site to search for discounts and deals?

Many Internet users have.

Many Google for coupons from suppliers, enter them into coupon code fields at checkout and save themselves hundreds, if not thousands of dollars by taking advantage of deals online.

With a turbulent economy, it’s true that more people than ever are trying to find ways to trim expenditure. The coupon companies will tell you that coupons mean everyone wins. The retailer gets business, the consumer gets a discount and the coupon companies stay alive.

And it’s an industry that appears to be forging ahead.
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Nobody likes surprise charges at the last minute.

Make sure that your pricing is transparent. People like to know what to expect. They don’t want to feel ripped-off or lied to. They prefer to deal with retailers that are honest. Display all your charges early and often.

In other words, don’t do this on your home page:

But forget to mention that you’re going to do this at checkout:

You’ll be accused of doing dodgy stuff.

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As with products in the bricks-and-mortar world, most services price in line with competitors.

(The exception might apply to a service has credentials that do not apply to competitors.

For example, the most high profile, successful lawyer in town may charge a substantially higher hourly rate than competing lawyers because he or she can rely on their brand to justify the premium price.)

Services are typically priced using billable hours.

To calculate a billable hourly rate, a cost model is applied.

To calculate an expected return, the service provider sets a profit objective, deducts their costs and divides the remaining amount by number of units to reach a price point.
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Traditional pricing models have been based upon cost where prices are set at a higher amount than the variable costs of the product.

This is how you derive a contribution towards fixed costs.

Using this type of pricing model, the marketer adds an amount to the costs which may be expressed as a percentage markup or dollar figure.

It is often used in retail because it is easy to apply.

It can also suit some manufacturers where volume applies or the market is price-driven.

Cost-plus pricing is often used to price custom products, such as the construction of a building.

Cost-plus pricing involves keeping track of the costs of producing the building, then adding an additional dollar amount or percentage of costs to arrive at the final price.
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A price war is quite a ride.

Gotta say, it takes some guts to hang in there.

For many businesses, the most sensible approach to a price war is to do absolutely nothing.

You have to have substantial resources behind you just to survive the carnage.

Eventually competitors that are not profitable because they are selling product below its cost will be forced out of the market.

(That’s when prices hike right up again.)

In the bricks-and-mortar world, the lowest price strategy is never a good idea for a smaller business.

The simple truth is it is that lowest price providers are the domain of large companies with deep pockets and big wallets.

Even low overhead concerns are going to struggle without size to their advantage.

For service businesses, it can be even harder since it is unlikely that they can bill a full 40 hours per person per week.
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The Argument about Volume:

Many, many businesses drop their prices on the assumption that more sales will be generated by it.

Anyone who has ever been exposed to basic economic theory will have heard about supply and demand.

In short, the theory goes that if you drop your prices, consumers will buy more. This almost never happens in real life. At least, not in a way that is sustainable.

What happens in real life is that one business drops its prices. Because of it, it may increase its volume for a short time before competitors become aware that they are losing market share to the cheaper supplier.

So the competitors drop their prices too, even undercutting the original cheaper supplier, to take the business back.

Before long, only the strongest competitor will survive the price war that eventuates. Once there is no competition left, the prices shoot right back up again.
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Almost everyone does it.

They get a product, look at the range of prices competitors charge, then charge somewhere in the middle.

If they are a smaller business, they can’t afford to price at the low end – that’s normally a position reserved for large companies.

If they price at the top end, they need to be able to explain why the customer should pay a premium.

It all gets too hard, so they price in the middle.

If you sit in the middle of the road long enough, you are going to get run over.

How your product is priced is intertwined with your brand strategy.

You have to have a brand strategy because people buy brands, they don’t buy no-names.

And your brand needs to mean something to them or it isn’t branding.

So this morning I saw a question in a forum relating to pricing in the middle of the road.

The business was getting buffeted by a price war and was wondering what to do. The answer is simple. The best thing to do is hold your price and execute a niche marketing strategy.
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Is your business overrun by trolls?

Businesses attract two types of customers – they get those sent from heaven that pay full price, snap up new products early and generate nice healthy profit.

Then businesses get stuck with trolls that suck all their energy, drain that profit and turn a perfectly respectful day into a miserable one.

The troll is going to argue about the price, exasperate staff with their endless rants, grizzles and whines, return purchases and demand their money back. To add to the insult, they buy your product back when it finally goes on sale, load it onto eBay and flog it for a profit. (That’s the same profit they stole from you.)

Sound familiar? Then put a plan into gear to dump the trolls starting today.
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Marketers that avoid price increases face exiting unprofitable products, adopting different pricing techniques such as bundling, or closing their doors.

When does a marketer need to increase prices? The short answer is when the time has come to increase the company profits.

And the best time for most companies to increase prices is when everyone else is doing it. This way you can join the crowd and not stand out. This strategy is commonly deployed by major banks shifting interest rates on loan products. One moves, the rest follow.

The best way for many marketers is to regularly review prices and increase prices in smaller incremental amounts so they avoid bill shock. Bill shock occurs when a customer receives a bill that is substantially higher than they anticipate. When bill shock occurs, customers may be motivated to shop around and compare your prices with a competitive offer.

Incremental price increases slip under the customer’s radar, or, at least, are more acceptable since most customers expect prices to increase in line with costs.

If a marketer’s costs increase, marketers should look to increase prices. Companies that do not increase charges in line with costs are accepting a reduction in profitability.

Finally, if a marketer is undercharging, signs emerge and remedial action should be taken and this involves increasing the price.
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