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Pricing for value

Pricing For Value

Everywhere in the marketplace there is aggressive discounting, specials, 'everyday low price' strategies. This is all largely due to economic as well as other world events causing uncertainty - but is it the best strategy for your business?

 

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Consumers are keeping a tight rein on purse strings, buying only what they perceive as necessities.

Do You Know where do you fit? – How do you play the game?

There seems to be only two places to be in the market;

  • the ‘Everyday Low Price ‘ sector, or
  • the ‘Top End’ niche sector  

 

It is a real challenge to compete in the Everyday Low Pricesector. You need strong market penetration and you need huge volume sales. You also need supportive suppliers who are prepared to share the low margin burden.

 

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To succeed with a Top End Niche strategy you need to be a specialist  with a good range within a specific product category. You have to offer top end service with well qualified / expert staff, and you need to build a long term trust relationship with your customers

If you find yourself positioned  in the middle of these two in the customers mind, then you will find the going tough in this economic environment.

To ensure you can grow your business you will need to develop and adopt new strategies.

You can do this

- by making you business sufficiently different and unique;

- having a real and tangible Point of Difference  and /or a genuine and meaningful ‘Loyalty’ programme which adds value and not just discounts.

Or you can do it by learning how to set prices in a way that creates value while still providing profits.  

In practical terms this might mean adopting some or all of the following strategies:

  • Maintain normal / high margins on the majority of lines
  • Be competitive on key price sensitive lines.
  • Use reduced margins on volume lines where it will lead to increased volume sales – but they will need to be aggressive and coupled to multi-buys
  • Use a few loss leaders to build foot traffic.
  • Hold 3-4 Sales each year to drive volume.
  • Clear ageing seasonal stock to minimise loss and maximise stock turn.This frees up cash and space for new seasons stockSale2.jpg
  • Buy in popular big selling lines in volume at a good negotiated low price to sell at a low price
  • Create a perception of value through aggressive bold red price signage.

The overall effect could be that your overall gross margin may drop  2 – 3%, but the gross profit $’s will be higher.

The net profit will increase because expenses will only have a minimal increase
The other overall effect is that your garden centre is perceived as being good value and competitive.

Often it is better to match competitors price, and sell some product at a low margin, than to sell none and have customers go to the competitor.

How can we protect and maintain an acceptable margin?

  • Maintain normal / high margins on the majority of lines – especially non – known value lines, and perceived high value lines.
  • Look for every opportunity to get ‘added value’
  • When buying volume lines to promote at a lower margin seek a good buy price to help off set the lower sell price. Good numbers should attract a 10 – 20 % better buy price
  • Always remember – ‘customer perceived value’ and endeavour to price at a level that will maximise gross profit rather than gross margin
  • Rationalise the supply chain
  • Monitor sales and profits regularly
  • Introduce a Variable Pricing strategy: 

Variable pricing means varying margins and price points, across your total product mix,  to create an acceptable price variable among customers. Variable pricing takes into account :

  • Psychology - how the customer thinks  (perceived value)
  • Demographics - requirements of different age groups / living styles
  • Marketing - customers pay more for brand leaders and added value products
  • Competition - Price within 5% of your main competitor on price sensitive lines

For Price Sensitive Known value lines that can be, or are, sold in volume, …… set your selling price at a level that will sell volume, bring foot traffic to your store, and create a perception of value for your store rather than calculating the selling price from the cost price on a fixed margin

Remember – volume and stock turn are also factors of profit as well as margin !  

The words Value and Perceived Value crop up a number of times in this discussion. What is more important to the customer – Price or Value? And what is value?

I am loyal to, and always endeavour to fly with, one particular airline. On one occasion, however, I decided to save a few bucks and take the cheaper carrier. I had places to be and deadlines to meet so I planned my times accordingly.  At check-in I was told the flight was cancelled and the next was two hours later. On arrival at my destination there were no stairs to get off the plane, and then twenty minutes later no signs of my luggage. Needless to say my plans and my temper were in tatters. I have never, and will never voluntarily fly with that airline again. Though my regular carrier is more expensive, it leaves on time, takes me  and my luggage where I want to go, and eases my journey with excellent service. This for me is value – the price becomes secondary.

So what tricks can we deploy to create a perception of value and take the focus off price?

One of the most common is the practice called Bundling:

  • Grouping several products together as an incentive to the customer to spend more money
  • Include 3 or more items, only one or two of them being discounted
  • The aim is to raise overall profit as average sale is increased.

An example of this may be a hanging basket kit – basket, liner, potting mix, plants, all for $ 24.95.That could be perceived as good value. But what if we were to un-bundle the bundle, as it were, and tell the customer the costs of the component parts – basket $9.95, Liner $4.95, Potting mix $5.95, plants $9.95, all for $24.95.Wouldn’t that underline and emphasis the real value, and wouldn’t the kit price become less significant in the customer’s mind, and the value more so?

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Another tool is the tiered offer – Three options in a range - the old good, better, best . The aim is to sell more of the middle of the range , where price and margin may be optimum. The price is not so relevant – it is the positioning in price of the 3 products that is important. A more expensive item will sell by getting the price points correct on the 3 items you have chosen to sell.  Consider how you buy  wine – do you buy the most expensive, do you buy the cheapest? – invariably you choose the one in the middle!

Offering expensive items in two sizes is another method you can use. This makes the smaller item look more attractive to the customer. Sales on the smaller item increase. It does not matter if the expensive size doesn’t sell – the aim is to sell lots of the smaller, cheaper item . This method is often referred to as bracketing.

Finally, remove the $ sign from price tickets. Oddly products without the financial symbol on the price ticket sell more quickly!

- John Russell