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.

Why do buyers pay premium prices…

…and find great joy in doing so?

My wife’s purchase, by all standards, was actually quite modest, but I couldn’t resist teasing her saying “You’re expensive!” She looked at me, smiled and said “I’m worth it!” Indeed, she is; she’s been the treasure of my life for 37 years.

The more I thought about her retort I realized how often we, as buyers, find great joy in some of the more expensive purchases we make. We make these purchases despite the fact that it’s not our habit to do so, despite the fact that it’s not in the budget and regardless of the fact that we really don’t need what we’re buying. We just want it.

Why is that? How is it that we can throw all logic out the window, spend incredible sums of money (money that we may not have) and experience great joy? Because we feel that we’re worth it.

All too often we overlook this aspect of pricing and how it enhances the customer experience. We forget that people ascribe value to what they purchase based on the price they pay. Buyers take great pride in acquiring the best when their perception is validated by the price.

It’s counter-intuitive, but you can enhance your customers’ experience by charging a premium price as long as the price is substantiated by value. Don’t deprive your customers of the joy of treating themselves to something special. Employ this simple technique and you’ll both be saying “I’m worth it!” And you’ll both be right.

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.

Part III: Stimulating Job Growth Through Innovation

In this economy that means hiring people when others are laying them off.  I realize that some downsizing was needed by virtually every company. We need look no further than the discussion in Part II where we discovered how easy it is to get tempted to take on second-tier customers (those with only a modest interest in what you offer) during good economic times – those times during which buyer have more discretionary income and are less value conscious.

Once that adjustment is made and you’ve narrowed your focus to those customers that value what you offer enough to pay your price, it’s time to start hiring. Why?

• There is a lot of pent up demand in the market.
• There’s great talent available.
• Innovative companies will garner a huge lead.
• Pent Up Demand

Take a moment and think of the things you’d buy if there was a little more certainty about the future. Now imagine how much demand exists for people who have been out of work for four months, six months or more.

To release this pent up demand we’ve got to put more people back to work – productively.  I’m not talking about welfare programs, I’m talking about investing in innovation.  But that requires money, doesn’t it? Where’s that money going to come from?

For those companies that have returned to profitability and added cash reserves, some of the innovation can be funded internally.  These companies can increase the funds they have available through modest price increases. The number of jobs that could be created this way is amazing.  Here’s a simple example.

Assume that every company raises its prices by 3%. That’s typically not enough to cause buyers who value what you offer to walk away customers.  If they do, then, as we discussed in Part II of this series, they weren’t really your ideal customers anyway.  Indeed, this simple 3% increase can  help you narrow your focus and adjust your operations to meet that focus.

Back to our example.  When we apply a 3% price increase to the 2009 GDP (Gross Domestic Product) of $14.2 trillion dollars here’s what we get:

• $427 billion in additional revenues.
• $171 billion in tax revenues based on a combined 40% federal and state income tax rate.
• $256 billion in profits available for further business investment.

Now let’s assume that enlightened business leaders take half of that $256 billion of profit and hire workers to help them develop new offerings and provide more valuable service to their ideal customers going forward.  We can expect 2. 5 million in new jobs from investing $128 billion of $256 billion in additional profits.  This calculation assumes a modest $50,000 pay and benefit package.

There’s one more factor to consider – the velocity of money.  When the Federal Reserve is trying to figure out how much money to allow into the system they consider the fact that every dollar in the system typically creates $7.00 of revenues throughout the system.  So when you hire me to coach you on how to get higher prices, I’ll take that money and buy groceries.  The grocery store buys their products from food distributors, who buy them from food producers, who buy seeds, fertilizer and equipment.  You get the picture.

While the velocity of money does vary, it typically hovers around seven.  Given the pent up demand that the recession created, I think it’s reasonable to assume that we can expect the velocity of money to be seven in the near future.

With that in mind, the $128 billion invested in hiring people will generate $896 billion in new spending which means new revenues for companies.  If we assume that a quarter of that $896 billion ($224 billion) gets invested in hiring, that would add 4.5 million in new jobs assuming the same $50,000 pay and benefit package.

Between the 2.5 million of jobs created with the 3% price increase and 4.5 million of new jobs created through the velocity of money we’d virtually eliminate our unemployment problem and generate billions in additional tax revenues instead of adding billions to the deficit in failed attempts to ‘stimulate’ the economy.

Even if only a third of those 7 million jobs were created, the demand for products and services would be huge.  It’s also a great example of a rising tide lifting all ships.  The more pent up demand that is released, the greater the spending, the more money available for growth across all sectors, the greater the number of jobs that will be created.  It’s the beginning of an upward spiral that will benefit all of us.

There are obvious holes in my analysis.  Not everyone is going to be comfortable raising prices.  Not everyone will have the funds to hire more people; they’ll need to replenish their capital base and rebuild their cash reserves.  Not everyone will be creative enough to innovate.  But for those that can, they’ll reap huge benefits.  One of those is access to talent.

Great Talent Available
In an economy like the one we’re experiencing there are a lot of talented people with a lot of great ideas on how to improve your customers’ experience.  The companies that are the first to invest in these people and the ideas they bring will create a commanding lead over their competitors – a lead that could take a decade or more to overcome if you don’t get succumb to the temptation to gain ‘market share.’

This talent is not only available in the ranks of the unemployed.  Many workers today are unhappy with their current employment.  Their increased productivity has been rewarded with little, if any, pay increase.  In many cases these people are even making less today even though they’re significantly more productive.  Use the profits you generate to go after the productive people and pay them according to their production.  After all, does it really matter how much you pay someone as long as their production exceeds their pay rate?

If you doubt that paying more for productive employees is an effective strategy, I refer you to the McKinsey study, War for Talent, in which they discovered that “A” players typically earn 20% more than “B” players, but produce 2 to 3 times as much as “B” players.  That’s a huge ROI.

Innovate to Lead
The key is to invest these new employees’ time and energies in innovation.  For it’s in innovation that the greatest ROI and the greatest sustainable advantage occur.  Innovative companies enjoy gross margins that are 10% or more higher than their competitors.  They’re able to lower prices at the time competitor’s begin to catch up, depriving them of the higher margins needed to fund future innovation.  Finally, the higher margins innovative companies enjoy allow them to invest more in their brand – making them the companies buyers think of first when they need what these companies are offering.

For those of you who may be struggling to find ways to innovate, remember that hiring people from outside our industry is a great way to spark innovation.  In his book, Chaos: Making a New Science, James Gleick said that the math that evolved from Chaos Theory should have come from the fields of math and physics; instead it came from meteorology and the behavioral sciences.  Breakthroughs typically come from outside the organization.

If you’re unwilling to hire that outside perspective or you’re out of ideas on how to innovate, please do the rest of us a favor and distribute your earnings and excess cash to your shareholders so that they can invest in innovation.  It’ll help accelerate the recovery.

I always look for ways to accomplish more than one goal from the same effort.  In this three-part series, Greatness: The Key to Accelerating the Recovery, my goal is to help you accelerate the economic recovery and gain recognition for your efforts.  I’m always interested in opposing viewpoints.  Please feel free to contact me, Dale Furtwengler, at 314-707-3771 or by email at dale@furtwengler.com.

To discover how you can command higher prices for your products and services – even in a down economy, 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.

Part I: Dispelling the Pricing Myth

Greatness is not measured by what we do in good times, but how we respond to challenging times. You can ascertain the greatness of your organization by comparing your actions during this, the most challenging economy in 70 years, against the essential elements of economic recovery.

The truly great companies are going to lead the recovery and enjoy a gigantic lead over their competitors for years to come. How? By:

• Dispelling the pricing myth.
• Narrowing their focus.
• Stimulating job growth through innovation

In this three-part series we’ll discuss these essential elements of economic recovery. How will your organization measure up? Let’s see.

Dispelling the Pricing Myth
A common misconception is that buyers become more price sensitive during difficult economic times. Indeed, this belief becomes a self-fulfilling prophecy. Leaders expect buyers to become more price conscious so they discount their offerings to retain their customers’ business. Voila! Buyers’ focus on price intensifies. Imagine that.

It’s counter-intuitive, but buyers become more value oriented in a down economy. Here’s a simple example to demonstrate my point. You’re at the grocery store in the canned goods section. As you reach for your name brand green beans you notice that the store brand is 40 cents less. You think “Hey times are tough, I’ll give it a try.” So you pick up a can of store brand green beans and one of corn.

That evening you serve the green beans and find that they’re mushy and bland. Most end up in the garbage disposal. What are you going to buy the next time you’re at the store? The name brand. The store brand is more expensive even though the price is lower.

The following evening you hesitantly serve the corn. Much to your surprise it’s every bit as good as your name brand. Which are you going to buy the next time? The store brand. The quality is every bit as good as the name brand and the price is lower.

Both decisions are value decisions. The only price decision was to try the store brand in the first place. After that you returned to value. Sellers who understand this simple concept and are truly providing greater value than their competitors may lose a few sales as buyers try a lower price alternative, but that business will quickly return once buyers experience the difference.

If you’re thinking “That hasn’t been my experience.” Then there are several explanations for your experience:

• You’re offerings aren’t really superior.
• They’re superior, but not in ways that your customers value.
• You’ve stopped selling value.

Offerings Aren’t Superior
In the 20+ years that I’ve been helping clients increase their prices, I rarely find that they’ve overvalued their offerings. Indeed, the opposite is generally true; they tend to devalue their offerings.

While this isn’t a likely explanation for why customers aren’t returning after trying a low-price alternative, it’s still worth investigating. It’s possible that your quality and exceptional service have waned and you’re not aware of it. After all, many buyers will simply walk rather than complain. They may even use price as an excuse to keep from telling you that you’re dropping the ball.

It could be that your policy-making process doesn’t anticipate the impact of those policies on your customers’ experience. A more aggressive collection or credit underwriting policy may antagonize customers and drive them away. I almost left my credit card company when they unilaterally decided that I need an ‘upgraded’ card that had absolutely no benefits I wanted.

The key in evaluating the superiority of your offering is to look at it through your customers’ eyes. There is no other perspective that matters.

Superior, But Not Valuable
A more likely explanation for why buyers aren’t returning is that while your offerings are superior, your customers don’t value the additional benefits your offering affords. I learned this lesson from a printer who asked me “Do you think that customers coming to my print shop want a great print job or a good print job?”

“A great print job!” I responded. He smiled one of those ‘gotcha’ smiles and said “Most people can’t tell the difference between a good print job and a great print job and the great print job is a lot more expensive. My customers want a good print job because they aren’t willing to pay for something they can’t see.”

How about your offerings? Have you increased the quality/service beyond what your customers value? If so, it may be the reason they’re not returning after trying a low-cost alternative.

You Stopped Selling Value
Earlier we discussed the misconception that buyers become more price conscious in a down economy when, in fact, they become more value conscious.

It’s this belief and the attendant fear that a down economy engenders that cause us to stop selling value. Recently I gave a presentation to a group of business people one of whom was a product supplier to the construction industry. While logically he agreed with everything I was saying about holding your price in a down economy, emotionally he couldn’t get past the fact that his customers were opting for lower prices. By the way, his offering was the ‘gold standard’ for his industry – a reputation that was earned from decades of exceptional quality and service.

Here are some of the questions I asked him:

Q: Are your products’ tolerances better than your competitors?
A: Yes.

Q: What does that mean for the contractor using your products?
A: Assembly goes more quickly saving time and money.

Q: Do your competitors’ tolerances result in higher product returns?
A: Yes.

Q: What does that cost the contractor?
A: Lost revenues while he waits for the right material.

Q: What does that do for his reputation with the general contractor?
A: Makes it more difficult for him to get repeat business from the general.

Q: What does that do to the general contractor’s reputation?
A: Damages it with his customer.

Q: Does that make it more difficult for him to get repeat business from his customer?
A: Yes.

Q: So how much money is at stake if all three of you lose a customer?
A: Millions.

This business man, not only knew the answers to these questions, they were questions he typically used when selling before the economy tanked. The reason he no longer used this sales approach is that he believed that his customers ‘only cared about price.’

That’s the misconception that began this discussion. The reality is that buyers become more value conscious in a down economy, not more price conscious. Indeed, value is less important to customers in good economic times. You need look no further than your own buying history.

In good economic times there were things that you bought because you thought you might enjoy them, even though they weren’t really all that important to you. Not today, you’re foregoing that type of spending to maximize the value you get from every dollar you spend.

Those of you who can use these insights to get past the myth that buyers only care about price are going to hold, better yet raise, your prices and resume selling value. In the process you’ll not only recoup some of the revenue lost when the moderately-interested buyer left, you’ll help your buyers get the greatest value from their dollars. They’ll show their appreciation by returning time and again to purchase your offerings.

How did your company measure up? If it wasn’t as well as you’d hoped, you now have a tool to help you move you to another level of greatness. The next tool we’ll discuss is narrowing your focus.

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

If you don’t have competitors…

…how do you establish your price?

In the Washington University class I spoke of last week there were two entrepreneurs who said that they didn’t have any competitors.  Their dilemma was that the lack of competitors didn’t give them a frame of reference in establishing their prices.  My response? “You’re lucky.”

The natural tendency, especially when starting a business, is to look at competitors’ pricing and set the price slightly lower than the market.  This strategy limits your revenue potential in two ways.  Obviously lower prices mean lower revenues on each sale.  Then there are the sales that are lost because buyers are leery of your offerings because the price is so low.

So how do you go about setting prices?  One way is to look at what the normal profit margins are in the industry you’re joining, then add 15% to 20% to that margin.  This approach has the advantage of being quick, but it doesn’t provide you with an effective way to justify that price to the marketplace.

It’s counter-intuitive, but if you want to get premium prices for your new offerings you have to be able to quantify and communicate the value to the market. Here’s a more effective approach.

Determine what it is that you’re selling – image, innovation or time savings.  Then ascertain where on the spectrum your ideal customer fits.

For image, is your buyer a Walmart, JCPenney’s or Nordstrom buyer?  JCPenney customers pay 3 to 4 times more than Walmart’s customers.  Nordstrom’s prices are 12 to 14 times higher than Walmart’s.

For innovation, are they early adopters, dependability buyers or late adopters?  Early adopters pay 3 to 4 times as much as dependability buyers and 12 to 13 times as much as late adopters.

With time savings we have to segment the group into two categories – retail customers and business customers.  Retail customers use their time savings for recreation and they’re willing to pay 3 to 4 times their hourly compensation for recreation time.

For business customers time saving means increased productivity.  If you know the typical profit margin for the industry you’re serving, the value of increased productivity is simply the additional revenues the company can generate without adding staff times their profit margin.

These simple guidelines not only make it easier to establish prices for your new offerings, but to justify those prices to your customers.  Happy selling!

To get higher prices for your products/services, call Dale at 314-707-3771.

Fantasy?

Or reality?

I had the opportunity to discuss pricing with a classroom full of entrepreneurs at Washington University in St. Louis.  Two of the students said that they were struggling with pricing because they didn’t have any competition.  Are they delusional?  Is it possible that they don’t have any competitors?

They were not delusional.  Both had created offerings that were significantly different than what the market was offering so they, indeed, did not have any competitors.  Unfortunately, that means that the remainder of the class had not developed an effective strategy – at least according to my definition.

It’s been my experience that companies excel only when they provide something the market wants or needs that it isn’t getting.  If your strategy doesn’t do that, what reason do buyers have to buy from you?

It’s counter-intuitive, but if you feel that you have competitors, you don’t have an effective strategy. Discover what the market wants or needs that it isn’t getting, then provide it.  You, too, will be saying “Competition, what competition?”

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