Pricing Strategies for Small Business

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Andrew Gregson. Pricing Strategies for Small Business

PRICING STRATEGIES FOR SMALL BUSINESS

Introduction. How to Get the Most from This Book

Where to Begin If You Need to Solve a Pricing Problem Tomorrow Morning

If you are a contractor:

If you are in retailing:

If you are in a service business:

If you are a manufacturer:

1. Why Is Pricing Important?

2. How to Know If Your Prices Are Alright

Is Price Just a Number?

What Makes Pricing Successful?

What is a decent profit?

Paying the owner

What is a reasonable wage for the owner?

The company and the owner pay their taxes

The business has no difficulty finding the cash to pay its bills

The business attracts the best quality customers who are willing to pay for the value added by the company

Example 1

Example 2

The business generates a reasonable return on investment

Example 3

Table 1: Where Is Your Money Better Employed?

Bids on jobs are planned to leave no money on the table

How Do You Know That Your Pricing Is Not Right? The Hamster Cage Syndrome

But shouldn’t you just cut costs and make a profit at lower prices?

Table 2: Pricing Function And The Net Income Effect — McKinsey and A.T. Kearney Studies

You hate your customers

Your company has a reputation for high prices

Summary. Your prices are probably too low if:

Your prices are probably alright if:

3. Typical Pricing Methods in Use Today

Classical Economics and Ye Olde Supply and Demand Curves

Table 3: Supply and Demand

Table 4: Equilibrium

Why is the theory so useless to the average small business owner?

Table 5: Why Do Prices End In 99¢?

Where to Begin? Follow the Crowd!

Table 6: Prohibition Story

Example 4

WAG, SWAG and STICK Methods

Estimating Solutions. Estimating software

Estimating books — OEM and industry service providers

DIY (Do it Yourself) Estimating

Table 7: DIY Estimator

The Trap of Customer-Driven Pricing

The Un-Trap of Customer Driven Pricing

Myth Busting: Market Share

Creating a Benchmark — Cost of Doing Business Surveys

Risk and Return

Table 8: Profitability Ratios

Example

Table 9: Kitchen Design Examples

Five Business Wreckers

Summary

4. Positioning for Price: The Role of the Unique Selling Proposition

What is a Unique Selling Proposition (USP)?

Sample of a good USP

Sample of a bad USP

How to develop a Unique Selling Proposition (USP)

Table 10: USP Worksheet

Example: Bugs Burger Bug Killer Company[3]

Table 11: FAB Examples

Example

Table 12: Promotional Pricing

Odd things that happen with pricing

Franchises

Perceived Value

Who Is Your Customer?

Example

So What, You Say?

Think Like a Customer

Step One: Analyze your customer

Step Two: Market benefits, not features

Step Three: Examine the cost variables

Summary

5. Value-Driven Pricing

Pricing Down from Value versus Pricing Up from Cost

Contracting: A Recommended Strategy for Finding the Customer’s Buying Price

Retailing: Testing the Water

Table 13: Florist Example

Consulting

Email One:

Email Two:

Service Businesses

Selling Industrially or Working with a Professional Buyer

Distributing

Customer Behavior and Perceived Value

Price communication

Proportional price evaluations

Reference Prices

Table 14: Reference Prices

Perceived Fairness

Gain-Loss Framing

Pricing on Purpose: Applying Value Pricing

Summary

6. Cost-Driven Pricing Strategies

Cost Approach Strategies

What is the cost of an item?

Example: Big-box store cost-driven pricing

Table 15: Big-Box Store Example

Table 16: Symphony Story

Know Your Costs

Table 17: Fixed and Variable Costs

Table 18: Fixed and Variable Costs, Weak Market

What Happens in a Strong Market?

Summary

7. Marketing and Sales: Where Your Pricing Decisions become Reality

Captive Product: Finding Value in Linked Products and Services. Pricing products that must be used with the main product

Meeting the Price Objection

Example

Sales and Promotional Pricing

To facilitate the sale of one or two weak products by discounting an entire product line

To spur declining sales, create more store traffic or grow the customer list

Market penetration — to introduce a new product and gain immediate market share

To get rid of slow-moving inventory

To encourage the concentration of purchases

To reward long-term customers for good behaviour

Beware the Boxing Day Sale Syndrome

Beware of undermining morale

Price Discrimination

If Airlines Sold Bread

On Customer Behavior. The simple truth about why people buy and why they don’t buy

On Keeping Customers

Sales Training

Nine Guidelines for Presenting Your Price. Do not give your price first

Make the customer open, if you can

Make the buyer work hard

Sandwich your price between the benefits

Try to make your price non-negotiable

The cost penalties of not buying

Don’t squeeze too hard against the weaknesses

Let the customer win something

Finally, ask for the sale

The Value of Persistence

Pocket Price Banding

Bundling and Unbundling

Learning to Lose a Percentage of Sales

The Winner’s Curse

And What of That Feeling That You May Have Left Money on the Table?

Example

Selling Best, Better, Good

Example 1

Example 2

Example 3

Using the Price Structure to Motivate Sales Staff

Table 19: Cost versus Price

Responding to a Price War

Summary

8. Pricing Models

Influence of Capacity Utilisation

Engineering and economic measures

Output gap measure

New Product Introduction

Market Skimming

Table 20: Brand New Product

Table 21: Selling All 6,000 Units at $35 Profit Margin

Table 22: Layered Pricing

Table 23: Margin Dollars Earned with Layered Pricing

Penetration Pricing

Neutral Pricing

Activity-Based Costing (ABC) and Pricing

Limitations of ABC

Marginal Cost Pricing

Table 24: A Typical Marginal Cost Curve

Summary

9. Financial Analysis

Know Your Real Costs: Labor. What is the real cost of labor?

Table 25: Labor Cost Example

Table 26: Payroll Taxes as Part of Labor Cost

Know Your Real Costs: Product

Know Your Real Costs: Overheads

Table 27: Overhead Costs

Know Your Real Costs: Debt

Know Your Real Costs: Transaction Costs

The Impact of Discounting Prices. Calculating how many extra sales are needed to offset a price decrease

With no change to variable or fixed cost

Table 28: Impact of a Price Decrease

With a change to variable cost only

Table 29: Impact of Price Decrease and Change in Variable Costs

Table 30: Impact of Increased Sales

With a change to fixed cost only

Table 31: Could a Price Drop Increase Sales?

Table 32: Sales Potential

Goal Setting From the Top

Table 33: Working backwards

Summary

10. Diagnosis and Prescription: What Should I Do to Fix My Pricing?

Table 34: Price Increase or Sales Increase?

Where Are You Not Paying Attention?

Table 35: Historical Income and Cost Analysis

What Are You Giving Away for Free That is Not Reflected in Your Prices?

Table 36: Historical Balance Sheet

Examine Your Customer Base. Do You Know What Your Customer Wants?

What Need Are You Satisfying for Which You Are Not Charging?

Check your Unique Selling Proposition

Test the Waters

Train Your Staff

Test Different Pricing Strategies

Going from Analysis to Action: Implementing a Price Increase

Summary

11. True Life Business Scenarios: The Case Studies

Paying Attention to Pricing: Examples from Other Companies

Case Study: Pocket Price Banding — Castle Battery

Table 37: Off-Invoice Discounts: A Big Part of the Pricing Structure

Table 38: A Single Product Can Have a Wide Pocket Price Band

Case Study: Generic Truck and Diesel Ltd. “Resetting the Clock”

Summary

Appendix I: Calculating Gross Margin versus Markup

Appendix II: Fixed and Variable Costs

What Is Fixed Cost and Its Impact On My Profits?

What is variable cost and its impact on my profits?

Appendix III: Analyzing Your Financial Statements

Appendix IV: Calculating Return On Investment

Strength and Benefits of the Return on Investment model

Appendix V: Calculating Labor Costs

Appendix VI: Calculating the Breakeven

Appendix VII: Calculating How Many Extra Sales Are Needed to Offset a Price Decrease

Scenario 1: With no change in variable or fixed cost, what is the price/volume trade-off?

Scenario 2: With a change in variable cost, what is the price/volume trade-off?

Scenario 3. With a change in fixed cost and variable cost, what is the price/volume trade-off?

Appendix VIII: Reading List

Appendix IX: Websites

Acknowledgments

About the Author

Notice to Readers

Permissions

Self-Counsel Press thanks you for purchasing this ebook

Contents

Отрывок из книги

I have written this book as a journey that seeks to explore the nooks and crannies of pricing, since it is a matter of great concern for small businesses. As such, it is long and involved.

If you have the leisure to read this book from page one to the appendices, then good for you. If, as I expect, you need to prepare a price for a customer tomorrow morning and want an answer now, then the outlines below will serve their purpose.

.....

It is a good return if the $200,000 you have invested in your business gives you better returns than the bank would after taxes and your salary are paid. What this means is that if the cash you have invested in your business could be taken out and plunked into a bank account, would it earn more money than where it is currently in use?

If $200,000 in a nice, safe bank account generates 15 percent in interest revenue per year, it will give you a a tidy $30,000 a year income before taxes.

.....