Setting the Right Price to Attract and Hold Customers

Pricing is a challenge because it must represent your cost of production as well as meet your customer’s value for your product or service. Typically, a business will set a selling price on either a value based or a cost plus based system. Market conditions dictate, which approach, is used. For example, to use a value based approach you need to set the selling price at a level the consumer is welling to pay because the product or service meets their needs (it has value). A value based method is practical in highly competitive situations since the customer has alternative suppliers of comparable services or products, while the costs of providing such a service or product various. The cost based approach is generally used when your competitors are operating from the same costs of production and the pricing is highly competitive.

Find the Costs

Finding the costs to provide your product or service is a critical first step. The process includes identifying your production costs; this includes fixed and variable outlays involved to offer your product or service. Rent, salaries, property taxes, insurance and any other expenses that remain constant are considered fixed costs, while variable costs include those expenditures that fluctuate with the number of products produced or services offered, and, may include raw resources, hourly wages, sales commissions, and other related costs. Generally, you would add up all of these various expenses to determine your product or service cost per unit sold. Next, you will want to establish the markup value of your product or service. This will require research and discussions with a number of people in your industry, trade, and community; your objective is to determine a competitive percentage of markup. Of course, a number of factors will play into the percentage of markup that you establish, and, even then, you will vary your price on occasion to meet the marketing needs you encounter.

Remaining Competitive

The most critical questions to be answered in establishing a selling price are your competition and the price you pay to produce the product or service you offer to consumers. Your competitive edge is always driven by the purchase price you paid to offer a service or product. In today’s world, this can mean other local venders, but, just as likely, it can mean large multi-state or even international companies, such companies have the ability to buy larger quantities of products or offer a wider range of services, thus, the potential to offer a lower price. In this case, you may have to adopt a market strategy that involves business practices that attracts customers for other reasons than price alone. This means to remain competitive you may need to depend more on service, location, or other strategies.

Remember to remain flexible

Remember, you can set different prices for different customers to take advantage of higher profit margins when possible and, alternatively, seek higher volumes when lower prices justify market penetration.
The point is remain flexible in your pricing policies by taking advantage of the uncertainties in the business cycles, stay alert to your consumers’ values of your business as well as your competitors. The guiding principle in setting prices is to focus on the amount of gross profit produced by the volume of sales in relation to operating costs. Thus, know your operating costs to measure your survivability in pricing your product or service, be aware of your customers’ needs, and be watchful of market trends to avoid any adverse changes that might affect your business.

How Adaptable is Your Business Model?

Good ideas help your business evolve.

In a market economy, variation and selection are always at work. New ideas are created by scientists and engineers, meticulous middle management in large corporations or daring entrepreneurs.
Failures are culled because bad ideas do not survive long in the market place: to succeed, you have to make a product that customers wish to buy, at a price that covers costs and beats obvious competitors. Many ideas fail these tests, and if management does not shut them down, a bankruptcy court will.

Trial and Error

Good ideas spread because competitors copy them, the staff leaves to set up their own businesses, or because the company with the good ideas grows. With these elements of variation and selection in place, the stage is set for an evolutionary process; or, to put it more crudely, solving problems through trail and error.
In a complex, changeable world, the process of trial and error is essential. That is true whether we harness it consciously or simply allow ourselves to be tossed around by the results.

Elements at Work

Most real-world problems are more complex than we think. They have:

1. The human dimension
2. The local dimension

Dealing with Complex Problems

First, seek new ideas and try new things. Second, when trying something new, do it on a scale where failure is survivable. Third, seek feedback and learn from your mistakes as you go along.

After an exhaustive study of businesses in the United States, 43 companies were selected as being excellent examples of successfully run enterprises. Out of this effort Tom Peters and Robert Waterman wrote "In Search of Excellence" to great acclaim in the early 1980’s.

Peters became one of the most highly recognized management consult gurus of the late twentieth century because of this work. However, after only two years, 14 of the 43 companies were in serious financial trouble. That’s a whopping 1/3 of the original 43 companies. To be fair the early 80’s were going through some very serious financial times.

Peters’ effort to identify the truly most outstanding companies in America fell short. Why?

The Ideal Hierarchy

Even an ideal hierarchy can backfire. The three elements of the idealized, decisive hierarchy: a “big-picture” view produced by the refined analysis of all available information; a united team all pulling in the same direction; and, a strict chain of command. Sometimes, even being able to check all three of these boxes can still product catastrophic results. The “ big-picture” information that could be summarized and analyzed centrally may not be the information that matters. A loyal, unified team can leave no space for alternatives perspectives. And, the strict chain of command can neatly suppress bad news from further down the organization before it reaches top management.

In an idealized hierarchy, a “team player” is an asset that does not disrupt an effective organizational objective, but they may not be as effective as allowing opposing views to introduce another perspective. Never confuse loyalty and expression of disagreement. Loyalty is valuable asset in an employee. As the owner, manager you need to judge the loyalty of your staff by very specific criteria. Expressions of disagreement are not necessarily one of them. Unanimous advice should be viewed with caution.

A strong team – a kind of family- can quickly fall into the habit of reinforcing each other’s prejudices out of simple team spirit and a desire to bolster the group. It is far better to more aggressive about demanding alternative opinions, exhaustively exploring risks, and breaking up your advisory groups to ensure that they don’t become too comfortable.

Don’t always rely on “big-picture” information all the time, focus instead on the specifics of the situation before you to solve a tactical or strategic problem.

It is not enough to tolerate dissent: sometimes you have to demand it.

It is simply impossible to know in advance what the correct strategy will be. That is why trial and error will always be a part of how any organization solves a complex, ever-shifting problem.

Eight Reasons for Customer Defection

Customers come and go for all sorts of reasons. It is unrealistic to expect customers to rely indefinitely upon one vendor or service company; we must accept that a portion of them will leave for a number of reasons. Market analysis of customer behavior has demonstrated eight specific factors that influence decision makers’ actions; six of these are controllable by you and your employees, and will be discussed further in the next post. For now, we will briefly explore each of the eight possible reasons customers switch from one business to another.

Price

This one seems fairly obvious, but for a variety reasons can be difficult to understand why a customer would choose someone over your product or service; especially, when, all things considered, you are both offering comparable items or services. Certainly, discounts, and such, will have an impact on customer behavior. Other factors play a role in pricing, too, for example, the economic level of the community, employment patterns, and mobility of customers. The last influence leads to our next reason for defection.

Inconvenience

Location of your business is critical in attracting and retaining customers. This holds true for you and your employees as well. If your client base is located at a great distance your travel time and expenses will adversely affect your ability to meet the customer’s needs. Equally, the distance customers must travel to acquire your products or services can negatively impact their decision to use your company.

Product Failures

Not too surprisingly, this is a major reason for customers to stop coming to your company completely. Quality control is critical in the opinion of most consumers. Your selection or use of products will have a direct impact on customer satisfaction.

Employee Responses to Service Failures

How your employees (and you for that matter) handle mistakes, shortcomings, or poor quality of a job performed will directly influence how your customers consider doing business with you in the future.

Ethical Problems

Fairness in your dealing with customers will always payoff in terms of customer satisfaction. Any sleight perceived by your customers can be cause for defection. In some cases, you or your employee may not even be aware of such negative perceptions because your business environment may not consider the implications of some of your company’s actions.

Involuntary Effects

Sometimes bad things happen for no good reason. Life is like that on occasion. Good luck and continue on as best you can.

Competition

Free enterprise has proven to be one of the greatest inventions of the modern world; however, it can cause us to stay up at night. If you have been in business for more than an hour, you know how your competition can influence negatively your customer base.

Service Failures

Delays in deliveries, misunderstandings, and a whole range of other mistakes fall into this category. Any one or another of these can jeopardize customer retention. In our next post, we'll explore various means by which you can overcome at least six of these reasons for defection, so hang in there! I am sure you already have experienced some the issues discussed above and probably have many suggestions of your own on how to overcome these problems. Please feel free to let us know in the comments how you would cope with these problems or any others that you have encountered.