Ugly Cats, Boat Shoes, and overpriced Jewelry: The Sheer Illogic of Pricing
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Ugly Cats, Boat Shoes, and overpriced Jewelry: The Sheer Illogic of Pricing
Pricing ranks up there with perhaps the top five business decisions you can ever make, go too high and demand drops off, go too low and you leave money on the table, but there's other 'illogical' forces involved.
By: Jimmy Mack
Whether you're a gym owner, martial arts school, or even a personal trainer, as small business people you probably painfully analyzed how to price yourself. Of course your decisions are made in context of your surrounding competition. All too often, businesses gravitate toward the middle of the pricing spectrum believing this is the safe ground. Marketing guru, Jimmy Mac, warns us that the middle can be deadly. Read on and get a fresh perspective on how to price your business.
A Denver woman needed to sell four reasonably cute cats. She placed an ad in the Atlanta Post:
Ugly Cats $100.00 each. 555-5555.
More than eighty people called. She said she could have sold the cats for far more.
Timberland was struggling in the early 1980's. The company made a good boat-type shoe and priced it below the leader, Topsiders. A great product for the price----but not a good business. Then Timberland did something fairly simple: It increased its price to be well above Topsiders.
Sales boomed -- just as they boomed for American Express when it took over the prestige niche in credit cards by pricing its card just one dollar more than a Diners Club card.
"…if you price yourself in the middle, what you are saying is: 'We're not the best, and neither is our price'…"
There was a frustrated owner of a Native American jewelry store in Arizona. She had not been able to sell some turquoise jewelry, even though it was peak tourist season. She tried sales. Nothing. She tried sales "training" (she encouraged her staff to be aggressive) Nothing.
Finally, the night before she was leaving for a trip, the owner left her head salesperson a note: "everything in this display case price x ½".
The owner returned a few days later and learned that everything had sold-but not for the reason she thought. The salesperson had misread the owner's scribbled note to read "price x 2" and doubled the price of everything!
Some people think pricing is one of the more logical acts of marketing. These examples say something else. Don't assume that logical pricing is smart pricing. Maybe your price, which makes you look like a good value, actually makes you look second rate.
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Pricing: The Resistance Principle
Just a few months into business, "I have made my first big discovery about business" a young woman once said to me. "There's one simple way to get all the business you can handle: Charge almost nothing."
If no one complains about your price, it's too low.
If almost everyone complains, it's too high.
So, if no price resistance is too low and 100% is too high, how much resistance is just right? How much resistance tells you that your price is right?
15% - 20% and there is one simple reason why: Close to 10% of people will complain about price. Some want a deal. Others are mistrustful and assume every price is overstated. Still others want to get the price they had in their mind when they walked through the door, because it's the price they hoped for and already have budgeted in their mind.
So throw out the group that will object no mater what your price, then ask: In the remaining cases, how often do I encounter resistance?
Resistance in 10% of those remaining -for a total of almost 20% -is about righrt. When it starts exceeding 25%, scale back.
" Setting your price is like setting a screw. A little resistance is a good sign. "
Avoiding the Deadly Middle
Companies in many services essentially set their rates by studying the going high and low rates, and then deciding where they fall on the quality spectrum. This unfortunate practice tells their students exactly how good the company really thinks it is.
Ask yourself: If that's how you are pricing your service, what you are saying to your members and prospects----that you aren't that great?
Another problem with this pricing strategy is the problem of the deadly middle. If you are the high priced provider, most people assume you offer the best quality-----a desirable position. If you are the low-cost provider, most people assume you deliver an acceptable product at the lowest cost-also a desirable position. But if you price yourself in the middle, what you are saying -again-is: "We're not the best, and neither is our price, but both our service and price are pretty good." Not a very compelling message.
The premium service and low-cost provider occupy nice niches all by themselves. If you are priced in between, however you are competing with almost everyone. And that adds up to a lot of everyones.
" Beware of the deadly middle. "
The Low Cost Trap
You can make a good marketing case for becoming the low cost provider. Your position is clear and so is your price; it's the lowest a potential member can find. But the low-cost position kills.
Where are they now, the great low-priced services of our past? The old synonyms for low-cost retailing-such as J.C. Penny, Montgomery Ward, and Sears---they are either dead, dying, or hurting.
Low-cost providers take it from several directions. Cutting costs requires little imagination, and the low-cost position can be seized without a large investment in brand building. So in most non-retail service industries, the low-cost provider is a relatively easy market niche to enter.
Just when you perfect your system for reducing costs, someone else devises a better one-as discount retailers discovered when Wal-Mart jumped in. This can happen with the advent of martial arts or fitness club chains, a good thing for the local consumer, and the huge chain, a tough thing for the low-priced mom & pop school.
" Beware of Rock Bottom"
Pricing: A lesson from Picasso
What is your talent and skill worth-and why is some worth so much? What can you reasonably charge? Good questions. Before you answer them, consider this story about Pablo Picasso:
A woman was strolling along a street in Paris when she spotted Picasso sketching at a sidewalk café. Not wanting to be presumptuous, the woman asked Picasso if he might sketch her, and charge accordingly. Picasso obliged. In just minutes, there she was: an original Picasso.
"And what do I owe you?" She asked.
"Five thousand francs," he answered.
"But it only took you three minutes," she politely reminded him.
" No." Picasso said. "It took me all my life."
" Learn To Charge by The Years, Not By the Hour"
Pricing: A lesson from Jimmy Mack
As an experienced, educated professional, remember, it's what you do, and what you know that defines your worth.
||When a potential client challenges my daily rate I tell her this story:
A man was suffering a persistent problem with his house. The floor squeaked. Finally he called a carpenter who friends said was a true craftsman. The craftsman walked into the room and heard the squeak. He set down his toolbox, pulled out a hammer and nail, and pounded the nail into the floor with three swift blows.
The squeak was gone forever. The carpenter furnished an invoice, on which he wrote the total of $100.00. Below the total he itemized two line items:
Knowing where to hammer: $98.00.
" Charge For Knowing Where"
Value Is Not a Position
If your primary selling position is good value, you have no position.
Value is not a competitive position. Value is what every service promises, implicitly or explicitly. It is fundamental to survival. A service's price must fairly reflect its value to the student, or the service will eventually fail.
Some legal services charge $50.00 for an uncontested divorce. Johnny Corcoran [attorney for O.J. Simson's murder defense] charged $2,000.00 an hour. Mr. Corcoran's clients say they get a good value, and most clients and experts point to Corcoran's results-a 16-1 winning record, and they say he gave good very good value, too.
In services, value is a given. And givens are not viable competitive positions.
" If good value is the first thing you communicate, you won't be effective.
If good value is your best position, improve your service."
About Jimmy Mack
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