One of the main reasons business fail is a problem in their pricing strategy. Craig dives into one key fundamental, what do your customers look at as the perceived value of your product or service?
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TRANSCRIPTION:
Episode 27: Pricing Strategy
Speaker 1:
From his first job flipping burgers at McDonald’s and delivering The Washington Post, Craig Willett counts only one and a half years of his adult life working for someone else. Welcome to The Biz Sherpa podcast with your host, Craig Willett. Founder of several multimillion-dollar businesses and trusted advisor to other business owners, he’s giving back to help business owners and aspiring entrepreneurs achieve fulfillment, enhance their lives, and create enduring wealth. The Biz Sherpa.
Craig Willett:
This is Craig Willett, The Biz Sherpa. I’m grateful that you’d join me today. Today, we’re going to talk about pricing strategies. It’s one of the main reasons businesses tend to fail. There are several different philosophies in pricing. Some people say, “Boy, I want to start out cheap so that I can get as many customers as I possibly can.” The question then becomes when you get the customers—and because you’ve sold it so cheap—that your product costs more. How do you raise prices so that you can be profitable? It’s not always possible to make up profits by volume. You really need to look at one key fundamental and that is what do your customers look at as the perceived value of your product or service? Someone told me a long time ago, “If you don’t value yourself, or your product or your service, how do you expect someone else to value it?”
So I think one of the best ways is maybe to start out on the higher end. Some people have started businesses and never felt that they could price it high enough because they felt they needed to apologize for their pricing. That’s one thing you should never do, apologize for your pricing. You need to believe in it. If you don’t believe in it, then you really need to think about your business strategy. I really like the thought of trying to perceive what that value is. We had Becky Veltema as one of our guests that you saw in December. She’s a good example of setting pricing for her product. As you recall, she does custom riding apparel for the equine industry, especially Arabians, Saddlebreds and Morgans for the competitors. Now, she wants to have premium clothing, but more importantly, she provides a service with that and she has to price in exceptional service going above and beyond the expectations and not have to nickel and dime them for little things later.
I think she’s a great example of being able to effectuate a value-based pricing mechanism. Now, some of you may say, “Well, I don’t know where to start.” Well, you may want to do a little testing, but I’ve known companies that have spent hundreds of millions of dollars on testing a product, such as New Coke, only to find out that the customers really didn’t receive it very well. So you want to be careful. And I know none of us as small business owners have that kind of money to be able to test our products out. A lot of people start out and say, “All right, what I’m going to do”—and this is an easy way—”I’m going to go and sample what similar products are selling at my competitors.” The danger with this is you may have a competitive advantage. You may have features that your competition doesn’t have.
So then it’s important for you to figure out what the differences are. You may use that as a start, and I’m not saying to totally ignore that. But when you have additional features, you need to make sure then you have a marketing and a communication strategy that goes along with your pricing that adds that additional value. When you only take into consideration someone else’s price and assume your potential customer is going to go out and price shop and not look at features that add additional value, then you’re discounting yourself. Now, you may say that some of your features don’t really add value and therefore you have to ask yourself, Why are you producing potentially a more costly product with features that no one else values? But I would say, look to see what those values are. When I developed office buildings, one of the things I looked at is location.
Where is the location that has multiple points of entry? Where are they so that the building is visible from the street and that customers and patients and clients can drive right up to the front door and walk in? There’s value in that. I know that because I had a project that I built right next to another one that had an interior courtyard and only signs on the outside. People had to park and walk inside to try to figure out where it was. I sold for over 30% more and sold out in half the time of my competition. That goes to tell you that there’s more to value than price. Otherwise, why did JC Penny fail? They did its pricing strategy like Walmart. Walmart says, “Everyday low pricing.” That was their start from the beginning. JC Penney switched theirs to everyday low pricing instead of giving coupons and sales.
And I think what it did is it took away the people that they attracted through their marketing, because they could just walk in and get it. Not every t-shirt is a $7 t-shirt. Go to a Gucci store and buy a $500 t-shirt sometime and ask yourself the question, “Why do people pay that?” There’s a perception of value and you need to be careful that you don’t try to copy someone else’s pricing strategy when you’re set up differently. Another way to base your pricing is cost-plus. This is a dangerous one too, but I think competition and cost are important. You want to price at a point that is high enough that you have profitability or gross profit, which is the difference between your selling price and the cost of each unit of product. So if you’re selling a t-shirt at $10 and it costs you $5 to make, you’re making $5 in gross margin on each t-shirt. Or maybe a better example, it costs you $4, you’re making $6 of gross margin.
Now, you shouldn’t apologize for that because that’s not your profit. You still have all the costs of operating the business so that you need to make sure you cover that as well to get to your profit. The problem with cost-plus pricing is it lends to you narrowing your margin unnecessarily. I think it’s important because it’s a place to start and maybe it becomes a base price that you consider. But then you have to start to look at, what are the values? What are the value propositions you’re going to offer to your customers? And I would say one of the best value pricing strategies that you can do is, like I said, communicate well what your product does that’s different than what the perceived competition may be.
Cost-plus does work in some instances. There are some government contracting situations where you have a certain cost and they allow you a certain margin on a government contract, and you’re entitled to that margin and you have to account to them for each of your costs. That’s a valid method, but just make sure your margin portion is enough to cover all your other operating costs and overhead.
Now, another way is dynamic pricing. You’ve seen this and we’ve all experienced it. Right? We buy an airline ticket well in advance and we get a pretty good price. As we wait closer to the time to travel, all of a sudden that $100 airplane seat is now, in most cases, $200 or $300. Same thing at hotels. When you book in advance, you usually get a pretty good rate, but as it comes closer and there’s more demand and fewer rooms available, they start raising the price.
So if you’re in that type of business, you better understand the dynamic pricing model so that you don’t just have $100 per room; you have to raise it as it becomes more and more scarce. I think that’s an important thing to consider, but most of us in our businesses probably don’t do that. You also see it with rents. When you have a certain amount of vacancy, there are incentives given or prices come down. But when there is a high occupancy rate, the cost to renew goes way up. Now, there are also incentives that companies do for giving free access to certain software. We’ve all probably done this, right? You get the free version that works a little bit, but it doesn’t do everything that you want. And then you get the email saying, “Hey, to get the full effect, you can upgrade for $100.”
And I think that works if you can convert people and if you want them to become familiar with what your product can do to a small degree, then that works. But for a lot of us that aren’t in the software business, that probably won’t work. Another strategy that you’ve all seen is hourly pricing. If you’re a consultant, a CPA, or a lawyer, you don’t know how much time it’s going to take to do a certain job, so you may put a price on there that just says you’ll pay back per hour of the hours spent to do the job that you’ve asked them to do. They don’t know how the other party is going to respond, or they may not know how complicated the task is for you to do. Now, for accountants out there, I do recommend to put value pricing or what I call menu pricing.
It’s something that I successfully did as a CPA. I got tired of trying to just figure out how to justify the number of hours it took to do a tax return. Not that that ever was a situation, but if you don’t want to sit there and say that you were inefficient, or maybe you logged your hours incorrectly, maybe you should consider and look at the complexity of the tax return, the number of schedules and the complexity of each of the additional schedules and put a price on it. My experience was that that allowed me to charge 30-40% more than what my standard hourly rate was for the tax returns. Tax season was always the most profitable time of year for me. I think that kind of menu pricing really works because it allows you to capture value for the work that’s done.
When the client comes and picks up the tax return, they look through and see each schedule and then see the cost or charge that you did for each schedule, it’s a little hard to argue with that, because then it points out the complexity of the tax return that you gave them to do. Now, that doesn’t always work in consulting, but sometimes it really does work. And some people throw in some additional value on top of that, such as a success fee. Oftentimes, a good consultant who comes in to solve a particular problem will not only charge an hourly rate, but will charge a success fee based on the adaptability and profitability of what you’ve asked them to do. So what I’d like you to consider is to look at that hourly pricing, but also look at other alternatives.
Another pricing strategy that works—and I’ve always said this—you’re better off starting out a little bit high. You can always lower, you can offer premiums, you can offer discounts, you can offer sales if you’re not getting the volume that you think you should get. Now, you need to be careful. You need to make sure you’re educating the marketplace and marketing to the right place and reaching your potential target market. But once you’ve done that, there’s always a possibility of reducing the price. Sometimes a new product loses its novelty and then becomes less and less valuable. We see that with Apple and the iPhones. They put out a product and then all of a sudden the prices start to decrease over time where they launch a new product and a new version. And I would say that’s important. We see that all the time in the grocery store. New and improved every time you go down the aisle and you notice the box gets smaller or the can gets lighter.
But I think we need to look at being honest with our customers, but also making sure that we are capturing the most value there is. Again, I mentioned a strategy that sometimes is called penetration pricing. Penetration pricing is to try to capture as much of the market as you possibly can get right from the beginning. These methods allow you to capture market share but a lot of times small businesses can never survive that initial launch. It’s hard to get the kind of funding it takes to do that, to capture market share. I think one of the best methods is to get the referral. That is probably the best method. If they perceive great value and that you’ve exceeded their expectations—I’ve said this before—they’ll go out and tell their friends about you. If you don’t exceed their expectations and actually fall flat on your face, which can happen too, you need to make sure your value proposition is such that you can deliver on it.
You want to be sure then—once you deliver—that they have a good experience. And if you’re able to deliver that and communicate properly, business will take care of itself. I’ve always said that. It’s not an issue if you’re taking care of your customers. And I think Becky Veltema is a great example of that in her episode that we did in December. Now, I think it’s important when we talk about pricing to think about how you can give that service. Going above and beyond. What does that mean? I’ve given the example many times of my father-in-law when I started my CPA firm said, “Craig, will you do me one thing?” I think he was worried about me providing for his daughter. “Will you go out once a week in the afternoon, take the afternoon off, don’t work in your office and go visit your clients. Show them that you’re interested, show them that you care.”
And there wasn’t a time that I didn’t go out—that when I did go out that it didn’t come back with additional work to do. I think it meant something to my clients that they knew I cared about them and I took an interest in them. Other ways that we might see this are when we have customers. I experienced this in the real estate development business, selling multiple buildings, not just to the same owner, but also sometimes to family members and friends. And when they had such a great experience with us, we didn’t just sell them a building, we kept them in the loop all the way across the process. When we started it, we sent them a measuring tape and asked them how we measure up. We sent them a hard hat when it was under construction, to let them know that they can own for less than rent, then to go out and visit the project.
There were a lot of things we did to stay in touch with the customers. In fact, even a year after we sent them a gift. And usually, each Christmas we invited them to a party of some sort. We also did other events for them to show that we care, that we wanted to get to know who they were and that things worked out well for their building. I think it’s that type of caring where we go beyond the dollars and cents transaction and turn it into a relationship. So I would consider, how does your touch point in your business create an opportunity for relationships. In service businesses it’s simpler, right? You get to see your customers, you interact with them on a one-on-one basis, you get to talk to them about their needs and their problems and then you’re able to then work on solving those and delivering the solution to them face-to-face.
I would suggest that you look at, if you’re in a different type of business, how you can be face-to-face more often with your customers, whether that’s in a message, whether that’s in a video that you send to them, whether that’s in greeting them when you run into them on the street or provide opportunities to be in front of them. I think it makes a huge difference. Again, pointing to Becky Veltema in the DeRegnaucourt episode that we had in December is really important because she likes to build that relationship with her customers and they become her friends. Think about that.
How can your customers become your friends? You’ll want to deliver a good product. You’ll want to take care of them. I think about it, not necessarily as friends because the Nordstrom family has gotten really big, their stores are everywhere. But one of the things that I always felt good about in buying a pair of shoes from Nordstrom was that if they didn’t work and I had them even for several months, they didn’t question that when I returned them. They allowed me to exchange it or get a refund.
And I think that’s important. When someone really wants to stand behind their product or service, that they would allow you to return it later. Bought my loyalty. And I think that’s really what it’s all about. We want to have loyalty. Now, one other consideration in pricing is you want to create a brand. There’s a story of a shop in Sedona, Arizona, who when the shop owner saw that it was a bunch of turquoise jewelry that wasn’t selling, told the employee to mark it down 50% and sell it. By mistake, the employee doubled the price and it sold out. Think about that. I want each of you to think about it for a minute. Sometimes when we have an excuse, sometimes the bargain’s too good to be true. Do we really want to put something out there that makes people question the value of what they’re getting?
I think that’s important when you have a premium brand that you’re trying to create. You need to have a premium price. That’s not to say that there aren’t different segments of the market and different levels that you can achieve in your pricing model and in your product rollout. Sometimes it’s important to find a product that’s an introductory product to get people familiar with your company. But if you’re really truly a luxury brand or want to be perceived as the highest value, then you need to take that into consideration in your pricing. Oftentimes, we want to look at other strategies that really play games with people where it’s a bait and switch. I recommend against that.
I think it’s important to be honest from day one with your customers on what it is you’re delivering. One of the greatest experiences I ever had was a customer who really appreciated what I did that they told their family, their friends, everybody they golfed with and everybody that they went to the bowling league with about me as a CPA. And you know, it wasn’t that they all came right away, but through the years they started to come and I was able to have a relationship with them like I did their relative or their friend.
I think that’s what’s important. We live in a society now of “make a fast buck,”—which I don’t think it’s important, but we live in a society of infrequent touching, not only when I talk about that infrequent contact not just because of the pandemic, but infrequent contact with our customers who are trying to do things for as little cost as possible. When I say relationships are not efficient, relationships take time. You need to build that into your pricing. Are you going to take time with your customers? There’s an episode coming up with UWM Men’s Shop.
And I think what you’ll see with UWM Men’s Shop is that they really understand the value of building that relationship with their customers because they rely on that year after year and it started in their fifth and sixth generation—I’m sorry, in their fourth and fifth generation. You’ll see that they rely on that because they’re in their fourth and fifth generation of doing business. And I would dare say that there are children and grandchildren of some of their customers that still frequent their business. Now, I think it’s important that we look at really, what are we giving for value? You can always lower a price, not only in sale, but if you really did miss the mark, lower it. There’s ways to produce a product possibly for less as well. But I think it’s important when you’re novel and new to make sure you capture that margin.
What’s the right margin? It depends on your business. I think there are statistics available and I recommend that you research what those are for your industry. But you don’t have to match those if you have something new, and exciting and that people really want. It’s important to have integrity across the value proposition from the quality of the product, to the level of service, to the message and marketing, to the packaging and to how you present yourself and your product. I think it’s important. I’ve heard this many times and I’m grateful for our listeners on The Biz Sherpa podcast. There are cheaper ways to produce this podcast, but I chose to go a more premium way because I think I’m giving something for free. And I know it’s hard for people to imagine that that Craig’s giving away the secrets to the store. Well, my objective is to inspire entrepreneurship.
I think it’s the greatest expression of our freedom as Americans. And I think that also is something very important to me that there’s a perception of value that I care, that it’s packaged properly consistent with the research and the resources that I post on my website. They’re there to inspire entrepreneurship. We need more entrepreneurs. We’ve found that even during the pandemic many people have lost their jobs and permanently. And there are values that they have, there are experiences that they have that can allow them to start a business. And I think it’s a great alternative to them rather than just looking for another job. Now, that leads to how do you start a business? And I’ve had a three-part series, and this is a continuation of that. Each month I add some more in depth on a segment of that, and today it’s pricing. But I’m going to talk about—and next month I’m going to introduce an episode about how to effectively finance the startup of a business.
Now, there aren’t a lot of alternatives out there, I’ll grant you that, but we’re going to discuss some ways that will work. And I’m also going to talk about a report from the Kauffman Foundation, which I think is a great asset to small businesses where they’ve done some studies and they’re actually working to try to get some other institutional money be made available to smaller businesses in the startup stages. It’s important. It’s important to our economy to create new jobs, not just for ourselves to keep ourselves busy, but also for the people that we can hire and give them opportunities also to provide for their families and make ends meet for them. I really think that the greatest value I get is to have feedback from you. I love hearing from you, and I would hope that you would share if you’ve benefited in some small way from something that I’ve said.
I ran into someone just today actually who has been watching the podcast and the YouTube videos that we play and said, “I always get a little nugget of something that I’m able to apply in my life and it makes a difference.” That’s what I’m hoping for. I’m hoping that each one of us can improve ourselves, be better, do better and be more successful, happy at the end of the day, happy that we have time together. I look forward to this time together. I love doing the interviews and it’s fun to spend time with people who really at the end of the day—and you’ll see a common thread through my guests—they become friends of mine in my life. I do business with them, or they’ve done business with me, or vice versa. But first and foremost, we become friends.
Think about that when you develop your product or service. If you were to sell that to your best friend, what would it mean to them? What would they be willing to pay? I know you want to give it to them as a gift, but I would hesitate to do that. You have to make a profit. You’re taking a lot of risk in starting a business, and you’re going to have to take from your savings, or from a bank, or from a credit card to do it and you need to be able to repay that. I wouldn’t be shy in starting a business if you really feel that it’s going to make a difference in people’s lives, make their lives easier, make them happier and be able to solve a problem that they have. That’s at the core of it. So when you do your pricing strategy, look at the problem, figure out how it’s going to solve it and then what value that might be to have someone solve a problem.
Think about it in your life when you’ve had a big problem to tackle and you’re sweating, staying awake at night, worrying about how you’re going to solve that. When someone comes along with a solution and offers that value, all of a sudden you have peace and you have calm, and the price to pay for that doesn’t seem to matter anymore. I remember someone told me—because I like to do a lot of work around my own home— say, “Why don’t you get some help?” I did. I hired a pool service and it’s been great. I haven’t had to worry about it. I also remember, and I love it because the handyman that I use is great. Lance, when he comes, he always says, “I’m here to do something for you, so you don’t have to do it.”
And you know what? He solved some of my problems. One of the things I’m not good at is organizing. You can ask anybody who knows me well. I am good at organizing in my head, but to physically organize stuff in my garage, I’m terrible at it. Lance came in and in a day took a five car garage and had it organized with everything on its shelf, everything by product or by type of tool and I’ve never had it look like that. I know my family’s stunned and it still looks good. I think you need to look at how do you solve that problem. And when you’re able to do that, your pricing all of a sudden doesn’t matter as much because you’re solving that problem. I hope what I’ve said today is useful to you. I think you’ll find some good tools on our website BizSherpa.co, and I hope you’re enjoying and sharing this with other people.
That’s what’s important, that other people have the opportunity to improve their lives and be inspired to start a business or become better at running and operating their business. That’s my hope. This is Craig Willett, The Biz Sherpa. Thanks for joining me today.
Speaker 1:
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