Is SWOT analysis helpful in setting prices?

Or a road map to disaster?

SWOT (strengths, weaknesses, opportunities and threats) analysis is used in a variety of ways for a variety of purposes. Everything from strategy development to customer service enhancements to productivity improvement. Given it’s versatility, is it an effective tool for setting prices? Let’s look at each of the components.

Strengths
It would seem that knowing your strengths would be critical to effectively establishing price. After all, how do you know what your competitive advantage is if you don’t do a strengths analysis? Right?

That’s not been my experience. Most companies, when analyzing strengths do so from the perspective of what they believe the customer wants. Indeed, the ‘strengths’ they identify were often created in response to a competitor having made ‘improvements’ in their offerings. Yet neither they, nor their competitors, asked their customers whether they valued the enhancement.

A much more effective way to determine your offerings’ strength is to ascertain which of your customers are paying the highest prices for what you offer. Then asking them what they value most about your offerings. While you’re there, you might want to ask them what you could do to help them serve their customers better. Identifying your customers’ customers needs is a great way to gain a long-term advantage.

Weaknesses
In my experience identifying an offerings’ weaknesses creates only one result – lower prices for you. It’s human nature to place greater emphasis on our shortcomings than on our strengths. The unfortunate result is that we don’t charge for the value we provide.

How do we counteract this natural tendency? First, stop looking at weaknesses as failures. The reality is that perfection is not humanly possible. If you accept that premise, you know that your offerings will always possess some weakness, but so will your competitors‘ offerings. Focus on the value that your customers see, the value you identified in your discussions with them.

Next realize that, unless that weakness is resulting in a growing number of customer complaints or costing you sales, it’s likely that it’s an aspect of your offering that your customers don’t care about. If that’s true, then it doesn’t make sense to invest resources to remove that weakness?

Opportunities
I’m a strong advocate of remaining open to all possibilities. I’m equally strong in my conviction that analyzing opportunities to make sure that they make sense is essential. Over the years I’ve met a lot of people who are easily distracted by any shiny object that appears on the horizon with the unfortunate consequence that they don’t accomplish anywhere near their potential.

Here are a few questions to help you determine whether or not an opportunity makes sense for you and your company.

• Is this something I’m passionate about?
• Can I see myself working tirelessly to make this opportunity a reality?
• Does this opportunity fit our strengths as defined by those who pay us the most for our offerings?

Is this something that our best customers, those who value what we do the most, want?

These simple questions can help you quickly and effectively determine whether what you’re seeing is really an opportunity for you.

Threats
Unfortunately too many business owners/leaders look at their competitors as possible threats. The reality is that if you’re effectively helping your customers serve their customers, you don’t have any competitors. Looking at others in your industry as competitors simply clouds the issues and distracts you from your primary mission – finding new and exciting ways to serve those who value what you have to offer.

Often the greatest threats come, not from within your industry, but businesses outside your industry that are serving the same market you serve. Monitor the spending habits of your market to see where they’re shifting their spending. It’ll give you a sense for the value they perceive and what kind of value you need to provide in order for them to remain loyal customers and for you to maintain or enhance your profit margins.

It’s counter-intuitive, but there are many more pitfalls than advantages to using SWOT analysis in setting prices. Use the alternatives I’ve suggested and you’ll enjoy greater customer loyalty, higher prices, higher margins and a stronger bottom line.

Pricing for Profit is available at Borders.com, Amazon.com and BarnesandNoble.com.

If you’re discounting to retain market share…

…quoting Dr. Phil, ”How’s that workin’ for ya?”

“I can’t raise prices, the only thing that buyers care about is the price.” That’s the refrain I hear from audience after audience of business leaders today.

Is that really true? Do customers only care about price? Yes, it’s true – because we’ve trained them to focus on price. That happened well before the economy tanked. So let’s not blame the economy for a monster of our own creation.

The reality is that the vast majority of buyers are value buyers. The problem is that we’re not educating them about the value we provide or we’re not really providing the value they desire. Either way we’re causing them become more price conscious.

The typical retort I get is “In this economy buyers are deciding only on price.” Why might that be? Could it be that the vast majority of business owners/CEOs have resorted to heavy discounts to salvage market share? If so, what better question to ask than Dr. Phil’s “How’s that workin’ for ya?”

Not well at all. Most business owners/CEOs report declining sales despite heavy discounting. They see their markets shrinking and they’re afraid to charge higher prices for fear of losing even more sales. What these business leaders fail to realize is that buyers become more value conscious, not more price conscious, in a down economy. What that means is that we, as sellers, have to become even better at communicating value than we were in better times. Here’s an example to illustrate my point.

A steel fabricator for the construction industry said that the discounting had become so severe that some jobs were going for single digit profit margins. I asked him the following questions:

“When your customers choose a low-price competitor, are the materials they get within specifications?” “No,” he answered.

“When the materials are out of spec what are the implications?” “Delays, additional overtime costs, the temptation to make it work.”

“Do those delays cost your customers additional money?” “Yes,” he replied.

“What about the customer’s relationship with his buyer. Do these problems have the potential to create friction with his customer?” “Of course,” he replied.

“In an economy like this, how costly would it be to lose future business from that customer?”

You get the point. A few simple questions can help the buyer see the value of a higher upfront price over the costs, or more importantly, loss of future revenues.

It’s counter-intuitive, but when all of your competitors are discounting heavily in failed attempts to gain business you can distinguish yourself by selling value. Buyers will appreciate the fact that your helping them make an informed decision. They’ll value you even more highly when you show them how to do the same with their customers.

Pricing is one element of the buying experience.

Does your pricing enhance or diminish your buyer’s experience?

Has this ever happened to you? You’ve found a stain on your favorite dress; the one that has people using words like “drop-dead gorgeous” when describing how you look. Or, for men, it’s the power suit you wear whenever you’re getting ready to close a big sale. Either way, you’re at risk of losing the image that’s so vital to you.

As you’re bemoaning your loss, you hear an ad that claims that it’s stain remover:

• Removes stains that other stain removers can’t get out
• Is gentle on all fabrics, so much so that it doesn’t shorten the garment’s life
• Is green – it produces no toxic waste

You’ve heard all of this before and always been disappointed to find that the claims were unfounded. Still, if you don’t do something you’re not going to be able to wear your outfit again.

You do a little research and find that the claims made about this new stain remover have been substantiated by independent testing labs with stellar reputations for fair and honest appraisal of the products it tests. Maybe there’s hope yet!

Off to the store you go, thrilled by the possibility of saving your favorite outfit. You find the stain remover on the shelf and, much to your surprise, find that it’s actually cheaper than the competing brands. Quickly, what are you thinking?

Does the Hallelujah chorus come to mind? Or are you wondering whether the product is as good as touted? Is this another example of advertising hype? But wait, the testing labs all supported the product’s claims! Hmm, I wonder if the testing labs are as independent as I thought?

These are the kinds of doubts that we experience every time there is a disconnect between the marketing message we’re hearing and the price we’re seeing. In essence, when your price doesn’t support your marketing claims, you’re asking the buyer to choose which to believe – the marketing message or the price. When faced with this choice, which do you believe?

Typically we, as buyers, believe the price. Why? Because anyone can claim anything. We learn that at an early age and our skepticism grows as we grow older. That’s why we’re skeptical of advertising claims and more trusting of the price we’re seeing.

Let’s continue with our example. Despite the doubts you’re experiencing you decide to buy the stain remover. Why? You don’t have a choice. You know that the other products you’ve tried don’t work. This is your one shot at salvaging the look you treasure.

You’re earlier excitement has turned to doubt and anxiety. Yet you return home with the stain remover and, after several tests on old clothes, you apply it to your favorite outfit. It works! You breathe a sigh of relief and thank the powers above that it worked. Gee, wouldn’t it have been nice if the manufacturer had actually gotten the credit?

Seriously, is this the kind of experience you want your customers to have – one that’s plagued by doubt, fear and anxiety? Is this the kind of experience that’s going to keep them coming back again and again? Will it make them want to sing your praises? Or will their stories of you be littered with pain and anguish?

Here’s another classic example. You walk into an auto dealer’s showroom and find just the right car. As you were making your decision the salesperson touted the classic look, sporty feel and luxurious comfort – not to mention the incredibly great mileage the car gets. You sit down to discuss price. You tender an offer. Of course it’s unacceptable. He takes it to the sales manager and returns with a counter-offer. On and on the process goes until you finally settle on a price.

What’s the one question on your mind as you leave the showroom? “I wonder if I got a good deal?” Why are you wondering that? Because the car didn’t change, but the price did. Again, we have an example of price and sales pitch not meshing.

So what’s the message here? If you want loyal customers, make sure that your price supports your marketing and sales claims. Customer loyalty hinges on a number of factors. Customers must feel good about their purchase. Feeling good means feeling confident about the choice they made. Confidence in their choices comes from knowing that they made an informed decision. Where did that knowledge come from? To a great degree, it stems from the fact that the price matched the marketing claims.

This concept works regardless of the level of quality or service the buyer desires. If you’re looking for disposable plates for a child’s birthday party, a one-time-use product for people who could car less about aesthetics, you may go to one of the dollar stores. The price matches the quality. You know that you’re not getting much quality, but you’re paying an extremely low price as well.

On the flip side of the coin, if you’re looking for a high quality item with image enhancement capabilities, the price better reflect both or you’re likely to pass on the item. Why? If the situation calls for high quality and that quality is going to reflect on you, you don’t want any doubts about the purchase. You’ll go to an alternative that has a more congruent marketing/price message.

Stop confusing the market! Make sure that your pricing supports your marketing claims. You’ll enjoy greater revenues, higher margins and greater customer loyalty.

If  you want to become the Nordstrom of your industry or if you catch yourself thinking “I’m tired of working my tail off and not making more money,” call Dale at 314-707-3771.

Good strategy?

Or slippery slope?

In one of my earlier blogs I dealt with the folly of discounting during peak selling season. I guess it was inevitable that I was asked “What about the off season? Is it all right to discount then? Here are the thoughts that came to mind when I heard this question:

• Does everyone buy during the peak season?
• If not, then why do you want to discount?
• If you discount during the off season, how will your customers react?
• What messages are you sending to the market?
• Does this strategy really solve the problem you’re facing?

Let’s address each of these questions in order.

Does everyone buy during peak season?
Of course not. People buy when it suits their needs, not because it’s your peak selling season.

If not, then why do you want to discount?
Certainly the off-season buyers are getting as much value as the peak season buyers, so why discount? Ostensibly to generate cash during slow times, right? Let’s see how that plays with customers.

How will your customers react?
You don’t need to trust me on this. What would YOU do if you could suddenly save 10%, 15%, 20% or more during the off season? You’d wait until the off season to make your purchase.

If you want a sense for how well this strategy works take a look at the automotive industry. Whenever they experienced a sales slowdown the car companies offered a rebate, then 0% financing, then a rebate and 0% financing, then employee pricing, on and on and on until they trained us to wait for a deal before buying. If you’re looking for a reason for the huge losses they’ve suffered in recent years, you just found it.

What messages are you sending to the market?
First, you’re telling them that you’re hungry for business. As a buyer, and we’re all buyers, does that inspire confidence in you? Do you want to do business with a company that’s struggling? Are you concerned about service after the sale?

Second, if sellers can discount heavily during the off-season, provide the same quality and service and still make money, they must have been price gouging during peak season. None of us enjoys feeling that we’ve been duped.

Third, if sellers weren’t engaged in price gouging, how can they remain profitable at these discounts? The only answer is that they’re cutting corners – using lower quality materials or eliminating some of the service they normally provide. If that’s the case then are you really saving money by buying in the off season?

Does this strategy really solve the problem you’re facing?
Based on the answers above, no. It doesn’t solve the problem. It’s counter-intuitive, but this strategy is likely to exacerbate your cash flow problem in the long run as you shift sales from one period to another while giving up margin. So what’s the solution?

Learn to manage your cash flow so that you can use the slow periods to discover new ways to serve your clients – ways that will allow you to gain higher prices and margins. Or enter a counter-cyclical line of business – one that offers comparable or better margins than your existing line. Either strategy will help you avoid the problems associated with off-season discounting while positioning you for a bright and profitable future.

To discover how you can break the bonds of industry pricing call Dale at 314-707-3771.

Ted Gorski, Executive Coach and host of The Business Advantage Radio Show at WKXL 1450AM, asked me that question a few weeks ago in an interview that aired on his show.

I must admit that I was taken aback by the question. I had not previously sought to define the term ‘price.’ Fortunately, the answer came fairly quickly.  To me, price is an indicator of value.  Unfortunately, too often, that isn’t the case.

A few companies charge premium prices, then fail to deliver the value.  These companies tend not to survive very long.  It’s one thing to disappoint a buyer who was bargain hunting, but to disappoint one that’s paid a premium price to get what they truly want is unforgivable.

The vast majority of sellers err the other way.  They feel trapped by industry pricing so they charge what their competitors are charging even though they’re providing greater value.  Buyers love it!  Or do they?

When buyers don’t have an effective way to distinguish one offering from another; when they can’t determine why one offering is more valuable than another, they view all the offerings as commodities. This does NOT help them make informed decisions. Consequently, buyers rarely experience the satisfaction they should with the purchases they make.

It’s counter-intuitive, but your price should substantiate your value claims.  It not only allows you to get higher prices for your offerings, it enhances your buyers’ experience.  So the next time you establish your price, ask yourself this question “Does this price accurately reflect the value I provide?”

To discover how you can break the bonds of industry pricing, call Dale at 314-707-3771.

If you haven’t looked at pricing as a way of adding convenience…

…maybe you should.

One of my clients, a horse trainer who specializes in training horses and riders to win hunter/jumper events, offered a full array of services including:

• Training for the horse.
• Lessons for the rider.
• Boarding.
• Show arrangements.
• Show transport.
• Care for the horse during the show.
• Coaching for the rider during the show.

The natural tendency, when you have such a broad array of services, is to price them separately and allow the customer to pick and choose what they want. While this approach allows buyers to tailor the offerings to their needs it has downsides. Buyers spend time:

• Reviewing the invoice to assure its accuracy.
• Wondering whether or not the services were actually provided.
• Trying to recall whether they suspended some services that month.
• Wondering whether some aspect of the service is really worth the money.

That’s a lot of potential dissatisfaction! If you’re about to dismiss these as minor inconveniences recall your last airline reservation and how much time you spent trying to compare airfares.

From the business owner’s standpoint this approach created a lot of extra paperwork, phone inquiries about the bill and the need to, periodically, resell the customer on some of the services they questioned.

It’s counter-intuitive, but ala carte pricing often detracts from the customer experience rather than enhancing it. If you’re looking for a way to avoid the pitfalls do as my client and I did:

• Identify which combinations of purchases your customers make most often and with what frequency.
• Bundle them into packages that allow you to charge one price for the bundle.

That way, when your customer gets the invoice, a quick glance is all that’s needed to assure that it’s correct. As you can see, your pricing strategy can add a great deal of convenience to your customers and save you a lot of work in the process.

To discover how you can break the bonds of industry pricing call Dale at 314-707-3771.

Your organization can’t be great if you try to serve too broad a market. With every new market you target you run the risk of diluting your offerings. No where does this become more obvious than in conversations with clients about market share.

Market Share Objection
The objection I get most often when talking to business leaders about raising prices is “We’ll lose market share if we don’t discount.”  This inane infatuation with market share results in some of the most bizarre strategies any of us could imagine.  One of the most ludicrous I’ve heard recently is from a company whose margins have been shrinking for five years.  The CEO set a target of 5% growth in market share.

Can someone please explain to me how this company is going to attract more customers when its existing customer base no longer values what it offers?  A reality evidenced by five years of shrinking margins.

When people no longer value what you’re offering how can you possibly expect to increase the number of customers you have without shrinking your margins further?  To increase ‘market share’ you’re going to have to go after buyers who have even less interest than your current customers.  To get them you’ll have to offer deeper discounts to them and existing customers.

This infatuation with market share is one of the reasons we have had seemingly endless cycles of hiring and downsizing in the past 30 years.  The desire for market share causes sellers to pursue customers who don’t value what they offer.  Basically, there are three markets that any of us face:

If you’re going to pursue market share make sure that you’re basing your calculations on category 1.  My experience is that most companies combine categories 1 and 2 when calculating market share.  Here’s the problem with that approach.

During good economic times, buyers are more likely to spend money on things in which they have only a modest interest if the price matches their level of interest.  Sellers sense this and begin discounting to attract the second-tier buyers and do so successfully. Often the additional sales generated more than offset the revenue losses from discounting to their existing customers.

Sounds good, doesn’t it?  It does until you realize that you’re adding capacity (production and administrative) to serve customers who will evaporate when money gets a little tight, the economy tanks or another shiny object grabs their attention.  The capacity you added will have to be eliminated when any of these things occur.

When you weigh the short-term incremental gain in profits over what you could have gotten from your ideal customers vs. the cost of adding infrastructure, including hiring, training and learning curve costs and the cost of the buyout/termination packages on the back end, in the vast majority of cases you’ll find that gaining market share was an insanely costly proposition.

What’s the solution?  How can you use these insights to accelerate the economic recovery and get recognized as a consistently great company?  Narrow your focus.

Narrow Your Focus
Let’s take a look at a ‘market share’ war that’s raging right now to gain some insights into how costly these wars can be and how to avoid them.  For years Verizon’s ads have been beating up on AT&T by stating that Verizon’s service is more reliable. Ostensibly that’s because Verizon has invested heavily in a network that serves rural America as well as metropolitan areas as demonstrated by Verizon’s map.

AT&T is fighting back with claims that they serve 97% of the U.S. population and have faster download rates. Their ads do not address Verizon’s claim of more reliable service.

I’m not here to judge the accuracy of either company’s claims.  I do, however, believe that there are lessons to be learned from these ads.  Here’s what I surmise from these ads.

Verizon’s competitive advantage is dependability. Their ideal customer is someone who values the dependability their network provides regardless of where they’re traveling.

AT&T, on the other hand, has targeted large metropolitan areas where people are more likely to use apps.  Their faster download speeds may be one of the reasons why Steve Jobs chose AT&T over Verizon.

Assuming that both companies’ claims are legitimate, Verizon’s ideal customer is someone who places great value on dependability and is content with slightly lower download speeds for apps.  This trade-off between dependability and download speeds is one their customers are willing to make.

Conversely, based on their ads, AT&T’s customers appear to be more concerned with internet access speed and less concerned with dependability.  Their customers are trading speed for reliability.

Given these customer profiles, my question is “Why are they spending so much money trying to attract customers who don’t value what they offer?”

They’re trying to gain ‘market share.’  The problem is that neither has defined ‘market’ accurately.  They’re both viewing anyone who uses a cell phone or PDA as being equally valuable to them.

The reality is that both companies are going to have to offer discounts to attract the other’s customers. Dependability buyers aren’t going to switch to AT&T unless they get a really sweet deal. Even then they’re likely to switch back if they regularly experience dropped calls or internet access.

Similarly, Verizon isn’t likely to attract those customers to whom internet access speed is their primary interest unless they offer significant discounts. Even if they’re able to get these people to switch from AT&T, it’s likely that the slower download speeds will drive them right back into  AT&T’s arms.

What does this mean for both companies?  It means that they’re spending huge sums of money to attract customers who don’t value what they offer.  They’ll only get those customers by offering significant discounts.  The retention rate on these customers will be low.  They’ll have invested in infrastructure costs (production and administrative) to serve customers who won’t be with them for very long.  Oh, by the way, they’ll have given up revenues by having discounted their prices to their ideal customers.

The future will belong to those companies who narrow their focus to serve only those who value what they have to offer and are willing to pay the price to get that value.  Truly great companies will continue to utilize this strategy during good economic times when buyers are willing to part with money for things with which they have a fleeting interest.

The next step in accelerating economic recovery and achieving greatness is stimulating job growth.  That’s part three of this series.

To discover how you can command higher prices for your products and services – even in a down economy, call Dale at 314-707-3771.

What does aviation have to do…

…with your pricing strategy?

Imagine that you’re a seasoned pilot.  You’ve filed your flight plan when a massive snow storm hits. Visibility is zero and the winds are gusting up to 30 knots.  Are you going to take off?  Not unless you have a death wish. You know the dangers of flying blind.

Yet business owners fly blind time and time again. How? Let’s say that your competitor comes out with an improvement to its offering.  Your sense that their enhancement will give them competitive advantage so you scramble to provide a similar enhancement.  You just took off in a blinding snow storm.

First, you don’t know whether their customers, or yours, will value this enhancement.  Unless your competitor raised its prices to reflect the additional value the enhancement provides and their customers are paying that price, you don’t know whether the enhancement has any value to the customer.

Second, many business owners give away these enhancements without ever asking for higher prices. Why? Their rationale is that they’ll gain “competitive advantage” and garner a “larger share of the market.” How often has that really happened in your industry? Isn’t it more likely that there was little, if any, shift in market share?

If that’s true, your competitor drove up its cost structure without gaining any additional revenue. That means its margins just dropped.  Worse yet, you followed them blindly.  Your costs are going up as well, without the benefit of additional revenues.  If that weren’t bad enough you just made additional investments to do so. Ouch!

It’s counter-intuitive, but following a competitor’s lead in enhancing their offerings without evaluating their approach and the impact it will have on their bottom line is the equivalent of abandoning your flight plan and taking off into a blizzard.  The results can be devastating.

Discover how easy it is to command higher prices for your products and services, call me at 314-707-3771.

You can get my book, Pricing for Profit, by clicking on the book cover or by ordering online from Borders.com, BarnesandNoble.com and Amazon.com.

Enjoy!

Great strategy…

…or sheer folly.

Retailers have decided to move Black Friday, the day they begin their heavy holiday season discounts, up a month. Typically Black Friday is the day after Thanksgiving.

Why would they do this? Here’s what a major retailer said “We don’t think buyers are going to be spending as much this year so we want first crack at their dollars.” Is this sound strategy or a self-inflicted wound? Let’s take a look.

Let’s assume that you’re a retail buyer (who isn’t?), it’s the holiday season and you have indeed decided to spend less this year. Your child is pining for the latest video game. You see an ad for some great discounts on clothing for your child, which do you buy – the clothing or the video game?

If you’re like most parents, unless your child’s clothing is going to subject them to some emotional trauma vis-a-vis teasing by other kids, you’re probably going to buy the video game. Even if their clothes have to be replaced, you’re likely to go to the discount chains and buy only what’s needed in hopes of still being able to get that video game.

If what I’ve outlined is anywhere near accurate, what impact would a heavy discount at Macy’s have on your buying decisions? None that I can see. My experience has been that buyers spend money on what they really want. Don’t trust me on this. Simply recall a time when you drove through a trailer park and saw a dilapidated trailer with a brand new $30,000 pickup truck in the driveway. Or an older subdivision of 900 square foot homes with a $150,000+ RV in the drive.

These folks may have scrimped on their housing, eaten store brand canned goods and shopped at WalMart for clothing, but when it came to what was really important to them – the pickup truck or RV – money was no object. They paid the price.

Let’s take this analysis a step farther. Let’s see what the retailers are really accomplishing. As we’ve already seen, the likelihood of generating additional sales is low because buyers decisions are based on their wants, not on the availability of low prices.

Second, if the retailers predictions are accurate and buyers aren’t going to be spending a freely as in previous years, then it’s going to be even more difficult to attract sufficient buyers to offset the revenues lost through discounts. In other words a 20% discount means that the retailer must now attract six buyers to generate the same revenues they would have gotten from five. Raise that discount to 50% and you’d need 10 buyers instead of five. This at a time when you don’t expect lower traffic in your stores?

Third, discounts alter the timing of sales, not the volume of sales. If I offer a discount to people who would typically buy my offering anyway, I may get them to buy earlier but I’m not going to get them to buy more. By accelerating sales into the current month I’m digging a hole in future months’ sales. If I do this often enough (Black Friday occurs every year), I train my buyers to wait for a deal before buying. Now I’ve shifted from a shovel to a backhoe. I’m digging such a deep hole that I’ll probably never get out – think Chrysler and GM.

If this were baseball, the batter (retailer) would strike out. It’s counter-intuitive, but discounts don’t attract more business. They simply keep you from generating the revenues available to you.

For more information on how you can command higher prices for your products and services call Dale at 314-707-3771.