price problems and price pressures, but are these are rarely mere pricing
problems. They usually deal with communication, branding, image, product, distribution, service excellence, segmentation, and other ill-conceived, ignored or poorly executed functions of a marketing strategy that isn’t focused on value.”[1]
When you are finished reading this book, you will have a working knowledge of many different pricing mechanisms. Moreover, you will have the tools to examine your own business to enable you to measure the impact of a new pricing scheme. But best of all, you will have many pricing options to choose from, options that will help you to set prices so that your business will clobber the competition.
When I began preparing this book for publication, I began with my consulting experience for small companies that had not yet got the basics right. For the most part my clients didn’t grasp their real costs. Bidding on a job was something that happened on some distant planet in their imaginations, and bore no resemblance to the real world of their shop floors. A lot of my book is focused on helping small business owners to understand their costs and learn how to measure them.
As I have done my research for this book, I have dramatically expanded the value-added portion of pricing theory. In the past decade, pricing theory has reappeared in academic journals. The thrust of the research is no longer concerned with costs but with adding perceived value. The assumption is that the company knows its costs and as long as it covers its costs, it can proceed to add value by raising prices. I have used this information greedily.
If you read this book completely, you will discover that price is not purely a numbers game. In fact, it is difficult to get away from the notion that price reflects how a business delivers value to its customers. High prices ought to reflect high value. Low prices should reflect commodities with little or nothing injected to add value. Therefore a large portion of this book encourages you, the reader, to review your business as a potential customer would; what value do you offer, how much is that value worth compared to your competition’s offers, and is this transaction a fair trade?
Journeying down the path of price discovery entails looking into many dark and perhaps underperforming corners of the business. Therefore, this book touches on but does not exhaustively examine sales training, merchandising, estimating, motivation and marketing. In each area I have tried to keep the focus of the impact of pricing strategy on areas such as staff motivation, for example, and in reverse the impact of staff motivation on pricing structure.
As a business owner you only have to work half a day, and, better yet, you get to choose which twelve hours. I remember being a small business owner and how true this joke was for me. With that in mind, I have tried to recognize that the average business owner will get maybe five minutes of uninterrupted time to dip into this book and grab a useful idea, or perhaps the inspiration to read a whole chapter at night after business shuts down and everyone has gone to bed.
1. Baker, Ronald J. Pricing on Purpose. Creating and Capturing Value. John Wiley and Sons Inc. Hoboken, New Jersey. 2006
2
How to Know If Your Prices Are Alright
I argue throughout this book that a business owner must see his or her business as a struggle of perception. Customers strive to reduce everything to the most easily comparable state — apples to apples — and that means dollars per unit. A business must strive, on the other hand, to stop this from happening by presenting itself as pomegranates. If successful, then the customer cannot reasonably make a comparison on price only. Create a perception in the customer’s mind that the business, product or service is different, and long-term business success can be yours. Create differences that actually have value in the mind of the customer. Throughout this book there are examples of perceived value and how it can be converted into better prices and better profits.
Before we can pursue that topic, however, we need to know if pricing is an issue in your business. In this chapter, I have highlighted a number of ways to see if your prices are too low. In the appendices, I have added sections on the math calculations to confirm this judgment and to help you measure the impact that pricing your product or service too low can have on your business.
Is Price Just a Number?
Price is the amount of money charged for a product or service for the benefit of receiving a product or service. The word “benefit” is emphasized because small business owners frequently lose sight of the relationship between benefits and the simple transaction of buying and selling.
An example is that of eating in restaurants. Most people eat in restaurants to celebrate an occasion, for “date night,” or merely to take a break. The experience of eating out is the benefit, and the price tag cannot fairly be compared to the money spent if the same meal was cooked at home instead.
What Makes Pricing Successful?
Pricing is successful if:
• The company has a decent profit
• The owner is paid a reasonable wage
• The company and the owner pay their taxes
• The company has no difficulty finding the cash to pay the bills
• The company attracts the best quality customers who are willing to pay for the value added by the company
• The company generates a reasonable return on investment
• Bids on jobs are planned to leave no money on the table
What is a decent profit?
According to Statistics Canada, the average small company in Canada generates a profit before taxes of 5 to 10 percent of sales. This is not the only indicator of the health of a company but it is a good first step. With healthy profits, cash will be relatively easy to manage; Accounts Payable will be smaller than Accounts Receivable, the bills can be paid without having to hound customers who are just a few days late to cut you a check. If you miss a few weeks looking at the cash flow, it just doesn’t matter too much.
I don’t like averages; so what should the numbers be for my company?
Would you like to know what the median numbers are for your type of company? Wouldn’t it be great to know if your percentage of profit or sales costs or even rent is “normal?” There are some ways to get that information. Quite often there are industry organizations that conduct “cost of doing business” surveys annually. By joining a trade association, you could get a survey and compare your own financial statements. Sometimes the previous year’s survey is available at a small cost to give you a taste of the benefits of joining a trade association.
Paying the owner
Most importantly, a business exists to create profits after the owner is paid. Small business owners often lose sight of this objective in the sound and fury of everyday business, but a paycheck was clearly important when they began or bought the business. Getting the price right is the most important element in reaching the distant goal of financial security — either through profit generation or in getting
