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Hold the Line on Price

If you know your price is right, it's smarter to add a few useful extras than it is to charge less. Added value is worth more than a sale any day.
March 9, 2009
URL: http://www.entrepreneur.com/article/200508

This article has been excerpted from Beating Bailout Blues: How to Stay Sane When the Markets Are Driving You Crazy, by Rosalind Resnick, available on Amazon.

When business gets slow, it makes sense to cut your prices to boost demand for your company's products and services, right?

Think about it: If you've got a store and customers aren't coming in, what's the first thing you do? You hold a sale. Once you slash your prices by 25 percent or give shoppers who buy one pair of jeans the chance to buy another pair for 50 percent off, your merchandise will start flying off the shelves.

Wrong. Unless you're absolutely sure that charging less will boost your sales (which it rarely does), resist the temptation to do it. If you're selling a high-value product or service that your customers can't easily source from another vendor, slashing prices will only slash your profits. And if you cut your prices too often, you'll educate your customers to simply wait for the sales and never pay full retail. (That's what happened to the department store business, with mixed results.)

The reality is that, while price cuts may work for airlines and automakers (though they don't seem to be working so well any more), price cutting is usually not the best strategy for a small business--especially a business that provides specialized products and services to a target market that cares more about value and service than paying the lowest possible price. Not only does discounting generally fail to help you acquire new customers but it may also result in your making less money from the customers you already have.

"If you provide an exceptional product or service, people will buy from you--even in a tough economy," says Laura Allen, co-founder of 15secondpitch.com, a website that has helped more than 11,000 people pitch themselves more effectively to customers, employers and referral sources. Rather that cutting prices, "you'd be better off increasing the value that your clients get for their money. It's much easier to add a few useful extras, than it is to get by on even smaller margins."

While slapping a price tag on your product or service seems like a one-minute job, it's actually a lot harder than it looks. Set your prices too high, and you lose sales. Set them too low, and you lose money.

Over the years at Axxess Business Consulting, we've worked with many clients to help them analyze their pricing models and figure out how to maximize their profits without sacrificing revenue. As a result, one client--a quick-serve restaurant--was able to raise prices on some of its high-end juices by as much as 20 percent to 30 percent. Another--an outsourced relocation specialist--was able to re-price its hourly services as affordable, fixed-price packages geared toward corporations and high-net-worth individuals.

What's the secret to great pricing? While setting prices has always been more art than science, most businesses typically employ one of three strategies:

  1. Cost-plus
    You buy filet mignon from the wholesaler for $10 and sell it at your restaurant for $30.
  2. Market-based
    The restaurant down the block starts charging $29.95 for a surf-and-dinner, so you decide to do the same.
  3. Value-based
    First, you whip up a fancy, new tasting menu and charge $100 for a seven-course meal that costs you only $20 in ingredients (much higher than the standard restaurant markup). Then you pair each course with a selection of wines and you make even more money.

If you have any doubt which pricing strategy makes the most sense for your business (or any business, for that matter), just go to Starbucks and try to order a $2 cup of coffee.

"While it's tempting to cut prices, be very careful of any permanent changes to your pricing," says Sanjyot Dunung, CEO of Atma Global Inc., a New York City-based software company. "The hard calculation is if a price discount will lead to more volume and overall sales. You have to also note if more volume equals more profitability. Many people assume incorrectly that more sales means more profitability, but not always. In lean times as well as good times, you will serve your business best if your focus stays on profitability as well as gross sales."

Dunung's solution: "When working with customers or resellers, we have found that it is more useful to always note the SRP (suggested retail price) and then offer a temporary discount based on a customer or reseller. This strategy is harder for retail sales but works very well for our wholesale product side of our business. It's very important to stress that the discount is temporary so that your customer is aware that it is a unique opportunity. If you choose this approach, make sure not to repeat it too frequently or keep it in place indefinitely as the customers become used to the discount and base their buying decisions on the timings of the discounts. The risk, then, is that the discount becomes your de facto price."

When negotiating long-term contracts with resellers, Dunung makes sure to link discounts to guaranteed sales. "For clients who want a reduced fee, we request a multi-year commitment," she says. "This way, it creates a mutual win--they get their price, and we get a guaranteed contract. While you may leave some money on the table, having a guaranteed term of business can be very helpful in navigating challenging economic times."

Make the Pitch
One way to defend your value-based pricing is to let potential clients know upfront that you are excellent at what you do, Allen says. The best way to do this is to create a short pitch that will grab their attention and tell them everything they need to know about you in record time. According to Allen, every successful pitch has four key steps.

  1. Who You Are
  2. What You Do
  3. Why You Are the Best at What You Do
  4. Your Call to Action

For example, Allen's client, Karineh, markets herself as a high-end fashion photographer.

This is Karineh's pitch:

Hello, my name is Karineh. I'm a high-end fashion photographer, specializing in clothing, cosmetics and jewelry. I work with the world's most prestigious brands, including Versace, Victoria's Secret and Prada. I transform simple items into vividly beautiful objects of desire. Please visit: Karinehnyc.com to see select samples of my work.

"When you hear a pitch like that, you know that you are speaking to someone who is highly successful and can command top dollar," Allen says.

Bundle Your Products and Services
Another way to defend your pricing is to find new ways of packaging your products and services that allow you to charge more money, says Meredith Liepelt, president of Rich Life Marketing and a marketing expert, speaker and entrepreneur. Liepelt also publishes Smart Marketing, a free bi-weekly e-zine providing business owners with marketing best practices and creative ways to make more money. She says that, by "bundling" your products and services, you can sell your customers more products at higher prices than you ever could before.

For example, if you have 10 products, bundle them in three or four different packages. This way, you can charge even more than the total sum of the individual products if you toss in a bonus or two, Liepelt says. If you are a consultant or coach, you can even offer one hour of your time as well. This puts you in a direct conversation with a hot lead where you can demonstrate your expertise and upsell him into one of your high-end programs. If you have a gift shop, she says, you can create a membership program where customers pay a set monthly fee to receive VIP benefits such as notifications of new arrivals, customer appreciation shopping days, special hours, discounts, a free birthday gift, VIP trunk shows, wine tastings or specials from other stores in your area.

Margaret Prusan, the founder of Illumin LLC, a consulting firm that provides consulting, workshops, networking and resources to women entrepreneurs who own professional or service-based businesses, says, "There are lots of ways to keep current customers buying from you as well as attract new customers during difficult economic times. Reducing the price can cheapen the perceived value of the product or service as well as the brand."

Here are some of Prusan's tips and tricks:

Change the scope of your deliverable. Offer more value to your customer by expanding the scope of your work or deliverable while keeping it at the same price to offer more value to your customer. In service industries, this is often easy to do without incurring much additional cost because the "product" delivered to clients is knowledge or experience. In product-based businesses, hard costs will be incurred but this can be a great way to introduce a new product and test the market while providing clients with a valuable "bonus" or "gift."

Deliver more effectively. Find out how you can you automate your delivery, eliminate the middleman and cut out processes that don't add value to your end product or service. Consider creating processes that enhance delivery, save time and ensure quality.

Repackage your product. Consider repackaging your product or service to create the perception of greater value for the same or a "value-added" price. This can easily be done with what you already have at your disposal without incurring the costs of new product development. Repackaging can also mean offering options to customers. For instance, you can offer a "premium package" that can be broken down into individual products or services should your client's financial situation prevent him from buying the whole enchilada. By including value-added bonuses in the more expensive packaged options, you'll give clients an incentive to trade up because they feel they are getting a better deal.

Eliminate what's not selling. Don't fall so in love with your products or services that you're not willing to part with those items that aren't benefiting you. Consider eliminating a product or service if margins are low, sales are slow, your ROI is minimal, the product doesn't enhance your visibility in the market place and customers stop coming back for it.

Market the benefits of your product, not the features. Customers may be able to live without your product's features, but it's much harder for them to live without the benefits. Added or customized features can be seen as frivolous expenditures in tough economic times, but the benefits derived from them, such as saving or generating more time, money, energy or sales, are reasons customers can emotionally and intellectually justify. If you can show your prospect how your product or service relieves personal, professional or emotional discomfort for themselves or their loved ones, the prospect is far more likely to make the purchase. You can tug on those emotional purchasing strings by marketing their benefits.

Make customers feel good. Tough times are stressful for everyone. Create an environment where prospects and clients feel loved. Host an afternoon tea in your boutique to encourage customers to relax and linger while they check out your merchandise. Send out weekly e-mails with encouraging words or share great resources to let clients know you're looking out for their best interests. Refer customers or businesses you admire to other businesses that can help them, then let those other businesses know. Personalize sales by following up with a hand-written thank-you note. Small gestures like these can go a long way toward building great relationships with clients or prospects.