I’ll let you decide.  Here are behaviors that companies exhibit once they’ve gained competitive pricing intelligence.  They:

• Sweat blood over whether or not to raise prices 3% to 5%.
• Focus on price rather than value in developing their strategies.
• Highlight pricing in the marketing messages.
• Look for ways to cut costs only to give them up in their pricing.
• Add costly enhancements to gain competitive advantage.

Let’s explore each of these in more detail.

3% to 5% increases

Companies will fret over these insignificant price increases because there competitors aren’t raising their prices.  What these companies consistently overlook is the readily-available price data that shows how much buyers pay for what they truly want.  Here are a few examples:

• Image (large ticket item) – Mercedes S-class sedan buyers pay over 7.5 times the lowest price alternative sedan
• Image (small ticket item) – A sweater at Nordstrom will cost 12 to 14 times one at Walmart.
• Innovation – Early adopters pay 3 to 4 times what the mass market pays and 12 to 13 times what the late adopters pay.
• Time savings – Consumers pay 3 to 4 times their hourly rate of compensation for additional recreation time while companies will pay up to 50% of the additional profits they can generate from increased productivity.

Given these multiples and the fact that roughly 85% of customers are value buyers why would you fret over a 3% to 5% increase?  The only reasonable answer brings us to point #2, focusing on price rather than value.

Price vs. value

Companies that rely heavily on competitive pricing intelligence almost inevitably focus their attention on how to compete on price, not the value that customers desire.  Consequently they devote little time, effort or energy to monitoring their customers’ changing interests or, better yet, their customers’ customers’ interests.

When we stop adapting our offerings to the changing needs of our customers our offerings inevitably get taken for granted.  You know yourself that you may be WOWed by the first experience, still amazed by the second experience, by the third you’ve come to expect that level of quality/service and it’s now a commodity in your mind.

Companies fall into this trap more readily when they focus on their competitors’ pricing rather than the value their customers desire.  This result becomes even more obvious when we look at the company’s marketing messages.

Marketing messages

A company that is relying on competitive pricing intelligence’s ads, whether print, TV, radio or social media, will typically include language like ‘at an affordable price, at a competitive price or  the lowest price.

This language creates several problems.  It:

• Focuses the buyers attention on price rather than value.
• Offers no real differentiation between the value propositions of your offerings vs. your competitors offerings.
• If you do offer differentiation, at the very least you’ve likely confused the buyer with your low price; at the worst you’ve discredited your claims of having a superior offering.

Are these the outcomes you desire from your marketing?  I doubt it.

When we focus our customers’ attention on price we inevitably feel pressure to get our costs down which brings us to the next danger.

Cost cutting

Now I’m not averse to improving productivity which has the effect of, ultimately, bringing costs and pricing down.  That’s a part of the normal product life cycle which, in today’s world, is dramatically shorter than it was 20 years ago.  After all, it’s through productivity improvements that our lifestyles improve over time.

What I see all too often is that businesses, in an attempt to bring their costs down, attempt to strip out the value that customers once received to be ‘competitive’ in their pricing.  Consequently customers become disenchanted with the company’s offerings and seek alternatives, even if they have to pay more for them.  Regaining these customers loyalties is extremely difficult and often involves further reductions in price (margins) while costs are returning to pre costing-cutting levels.

In essence, the company experiences further margin declines to regain lost sales.  At that point they company’s leadership has lost sight of their primary purpose for being in business – to generate higher profits and returns for their investors.

An alternative to the cost cutting is offering enhancements which carries its own set of dangers.

Product enhancements

Instead of cutting costs some companies opt to continuously improve their offerings without seeking compensation for those improvements.  That way they can be perceived as being price competitive without actually reducing their prices.

There are several problems with this strategy.  First, they have no way of knowing whether or not their customers value the enhancements.  Unless you ask customers to pay for them you have no idea whether or not your customers value them.

Second, you’ve added to your cost structure without any future revenue enhancement potential.  As the banks have learned, once you offer a free service it’s nigh on impossible to charge for it later.  Those services become a constant drain on your profits.

Third, enhancements that aren’t valued by your customers do not increase customer loyalty.  Indeed, I’ve seen some instances where companies’ ‘enhancements’ have actually driven away some of their customers because it destroyed the value their customers enjoyed.

Finally, unless the ‘enhancement’ is highly innovative AND deals with some disappoint that your and your competitors’ customers experience in using your offerings, you’re not likely to attract your competitors’ customers.  Again, you’ll merely have added to your cost structure without gaining additional revenues.

As you can see, the path to competitive price intelligence is fraught with often overlooked dangers.  The simplest way to avoid them is to not embark upon that path.  Instead focus your attention on determining what your customers desire that they’d be willing to pay a premium to get and finding ways to satisfy those desires while being compensated well for doing so.

In my opinion, JCPenney’s ‘square deal’ ads miss the mark completely.  Here’s why:

• A ‘square deal’ doesn’t mean anything to customers.
• The ads focus on price, not value.
• Denigrating competitors hurts the denigrator more than the target.

Square Deal

You’re a consumer; do you typically make purchases that you don’t feel are a square (fair) deal for you?  Of course not.  If you feel that a company is trying to take advantage of you, you’ll go elsewhere or simply forego the purchase altogether.

Price Over Value

It’s amazing to me that so many retailers still believe that consumers only care about price when there is so much evidence to the contrary.  Yet that belief is exactly what JCPenney is expressing in its ads by focusing their customers’ attention on price instead of the value they provide.  Later they’ll lament the ‘fact’ that consumers are price sensitive.  What else would you expect?

Bashing Competitors

JCPenney’s ads ridicule their competitors for deceptive pricing practices – practices that, until a month or so ago, they themselves practiced.

Each of us has, at one time or another, experienced a personal attack where the attacker tried to elevate himself/herself by putting us down.  We also know what it feels like to witness such an attack and how we tend to side with the victim, not the attacker.  That’s the reaction JCPenny is eliciting from viewers of its ads.

Lesson

It’s sad to see such a well-crafted pricing strategy driven off the tracks by an incongruent ad campaign.  The lesson for all of us is that pricing is but one piece of the puzzle.

An effective business strategy requires congruency between the brand promise, marketing messages, sales scripts and price.  If any of the four fails to support (be congruent with) the other three, the whole strategy will fall like a house of cards.  That’s why I’m no longer optimistic about JCPenney’s strategy.  Hopefully these insights will help you avoid a similar mistake.

• Updating its stores
• Focusing on brands that ‘can’t be found elsewhere’
• Reducing it’s prices by 40% or more on all merchandise

These are bold moves, will they succeed?

The simple answer is a resounding “Yes!”  Here’s why:

First, Mr. Johnson’s plan involves rebranding the store to meet its customers’ expectations.  This isn’t just a price ploy.  Both the stores themselves and the brands they carry will create a clearer brand image and distinguish JCP from other retailers.

Second, JCPenney is going to stop the madness of offering frequent ‘discounts’ to get buyers in the doors.  We can but imagine the millions, if not hundreds of millions of dollars, spent designing, printing, mailing and tracking the various ‘sales’ that JCP used to train their customers to focus on price.  Under the new plan, the price is intended to reflect the value that customers perceive.

Third, JCP will be simplifying their customers lives.  When the need arises, customers will simply stop by the store and pick it up instead of waiting for the inevitable sale.  This new strategy also allows customers to ascertain quickly whether or not an item they’re considering is worth the price.  Customers will feel that it’s easier to make an informed decision about value.

Finally, the dissatisfaction, that customers experience from having missed a ‘sale’ or having bought too early only to find greater discounts later, go away.  In a world as complex as the one in which we live today, I can’t help but think that JCP will be rewarded for making our lives easier.

Kudos to Mr. Johnson and his team for a well-reasoned approach to retailing.  It’s one that I hope more retailers, indeed more businesses, adopt.

…..it depends.  It depends on whether the item being sold is a necessity or simply nice to have.  The Chevy Volt and Nissan Leaf aren’t necessities.  There are other modes of transportation readily available.  Those who feel that they must own one now gain are willing to pay huge sums of money to gain the satisfaction of being one of the first to own what is currently a ‘limited edition’ model.  It’s a story they’ll happily relate for years to come.

Let’s contrast that with the gasoline shortages of the early ‘70s.  Most people needed gasoline to get back and forth to work.  Mass transit wasn’t as readily available as it is today so buyers had fewer alternatives for getting to work.  Some began car pooling, but for those juggling schedules to get kids to childcare or school, car pooling was an elusive dream.

In the former example of the Volt and Leaf, sellers are satisfying a buyer’s desire to be an early adopter and profiting handsomely from it.  There’s nothing wrong with that strategy.  It’s not amoral even though you may believe the price obscene and the buyer’s behavior absurd.  The  key is that the buyer isn’t being forced to make the purchase from necessity.  It’s their desire that’s driving the purchase.

That wasn’t true during the gasoline shortage where a few sellers decided to profit from their customers’ fears by charging significantly higher prices.   While some buyers’ fear was great enough to pay these inflated prices, most avoided these establishments.  Later, as fear subsided, the owners that decided to profit from their customers’ misery discovered the law of reciprocity. Their customers left them for competitors who didn’t take advantage of them during the crisis.

What about price increases associated with temporary shortages?  Is that price gouging?

Let’s say that Florida experiences a heavy freeze which destroys a huge portion of its orange crop.  Is it fair to raise prices on oranges and products derived from oranges?  Of course it is.  It’s the basic supply/demand issue that’s part and parcel of every buying decision.  Oranges aren’t a necessity, there are many other fruits that can be substituted for those who don’t want to pay the higher price.  For those who enjoy oranges enough to pay the extra price, they’re paying for what they value.  They’ll forego other items that aren’t as important to them to get the oranges.

It’s counter-intuitive, but ‘price gouging’ can only occur when buyers participate in the process.  Even during the ‘70s gasoline shortage the vast majority of buyers drove past those stations trying to capitalize on others’ fear.  The reality is that when most buyers pay a higher than typical price for something it’s because they value it that highly.

…use them to your advantage.

It’s fascinating how predictable pricing is, especially during changing economic times.  During economic downturns the vast majority of companies discount heavily in failed attempts to salvage market share.  When the economy begins to recover we see a spate of price increases, ostensibly to offset the price increases the sellers are experiencing.

Interestingly even during good economic times we see companies discounting to gain ‘market share’ without accurately defining the market.  These companies see new potential buyers entering their markets and they want to capture the lion’s share of these new customers.  This behavior, like those of the economic downturn, are very predictable.  How can this knowledge help you?

Before we explore that question we need to understand the implications of these predictable pricing behaviors.

Discounting during an economic downturn

When I ask companies why they discount during an economic downturn I get one of two answers.  Either they say “I’ll lose market share if I don’t.”  Or they say “All of my competitors are cutting their prices.  I have to cut mine to remain competitive.”

In both instances, what they’re really saying is that they’re afraid of losing business.  The presumption on their part is that all business is equally valuable, that all customers are equally profitable.  You and I know that isn’t the case.

Here’s what really happens.  Buyers shift their spending to those things that they value the most, dropping those things that have little value to them.  Sellers who discount their offerings during an economic downturn fail to realize that they’re going to lose the moderately-interested buyers regardless of what they do.  Lowering the price isn’t going to change these buyers buying habits.  They’re still going to buy what’s most important to them.

These sellers also fail to realize that they are foregoing revenues that they could continue to enjoy from the customers who really do value what they offer.  We’re talking about the people to whom your offerings are so important that they’ll pay your price in good times and bad.  In essence you’re giving them an incentive to stay when they don’t need one.

With this pricing strategy you’re not only losing the revenues from marginally-interested buyers, you’re giving up revenues from your ideal customers.  Remember, these are self-inflicted wounds; they’re choices we’re making.  We can’t blame the economy or our competitors for these decisions.

Discounting during good economic times

Times are good, we have extra cash burning a hole in our pockets.  We can’t wait to spend it on something new and exciting, right?  Well, almost.  We want to spend this extra cash, but the item we’re considering is a little more than we’d like to pay so we negotiate the price.  Sellers seeing an opportunity lower the price and get your sale.

When sellers see this pattern repeated time and time again, they think “I could capture a lot more business if only I lowered by price by…”  Or they think “There’s a huge market out there that’s untapped.  All I have to do is lower my price and I’ll capture a huge segment of this market.”

Whether they realize it or not, these sellers are making a decision to go after buyers who are only marginally interested in what they offer.  To capture this market they’re lowering their price at the same time that they’re adding infrastructure to accommodate the additional volume.  Another double hit to the bottom line.

From our earlier discussion we know what will happen during the next economic downturn.  These buyers are all going away.  How can these predictable patterns help you?  By doing the opposite of everyone else is doing.

What to do

In good economic times raise prices instead of lowering them.  This allows you to enjoy higher prices and margins from those who value what you offer without adding infrastructure costs.

Yes, you’ll forego some short-term revenues in the process.  You’ll also miss out on the costs associated with trying to please buyers who don’t really value your offerings.  Is there ever a way to make a moderately-interested buyer completely happy?  Not in my experience.

During economic downturns, instead of following your competitors’ leads and discounting, raise your prices 3%.  It’s a small enough increase to prevent most customers from considering one an alternative to your offerings.  Even if they do go to one of your competitors, unless they have the same or better experience than they had with you, they’ll be back.  Why?  In tough economic times we alway return to value.

Another advantage of raising prices during an economic downturn is the message it sends to the market.  The price increase says:

• We provide great value.
• Our customers love us so much they wouldn’t think of going anywhere else.
• We’re not worried about the economy, we’re enjoying great success.

Aren’t these the messages you want to send to your customers?  Isn’t this the impression you want the general public to have of your company?

Is it true?

That isn’t the case for Ron Ameln, the owner and publisher of St. Louis Small Business Monthly.  Here’s what he said.  “I told my advisory board that I wanted to raise prices.  They told me that I was in a dying industry and raising prices would only accelerate my company’s demise.  I raised my prices 5% and revenues grew by 8%.”

Jay King, the CEO of Simploy, “the best PEO in the Midwest,” said “After hearing Dale speak and reading his book, Pricing for Profit, I began to price our services for new contracts based on value, not on our competition.  I was pleasantly surprised to find that our revenues grew even faster than the price increase.  Having the confidence to say ‘No’ to people who want lower prices makes running my business a lot more fun.”

In both these instances the customer base grew as prices went up.  Are these anomalies?  The short answer is “No.”  My experience has been that business owners who raise prices to levels that more accurately reflect the value they provide grow their customer base as well.  Why?

Because their value claims become more credible.  Instinctively buyers understand that higher value requires higher pricing.  During a recent speech a woman in the audience said “You’re right!  My 13 year old daughter is saving her money to buy a used iPad.  In anticipation of that day and to see how close she is to having the money she needs she’s been searching the internet.  The other day she saw a really low price and said ‘No point in checking into that one, there’s got to be something wrong with it’.”

At age 13 she’d already developed that instinctive knowledge that real value commands a premium price.  You don’t have to trust me on this, you know from personal experience that you become skeptical if the the price doesn’t reflect the value claims.

Armed with this knowledge it would seem that every business could raise prices and have the same experience, yet you and I have heard plenty of horror stories about companies raising prices and losing customers.  Why does this happen?

If a company raises prices and loses customers there are several possible explanations.  It failed to:

• Quantify and communicate its value effectively.
• Qualify the prospect before accepting them as a customer.
• Provide the value that customers want.

Let’s explore each of these in more detail.

Communicate Value
Many business owners/leaders have never been taught how to quantify value consequently they have a difficult time communicating that value.  The problem is compounded by the fact that buyers need this information to make an informed decision.  Indeed, they’re no more adept at quantifying value than the sellers.  When neither party, buyer or seller, can quantify value, it’s easy to see why raising prices would result in lost customers.  There’s no justification for the increase in either party’s mind.

Qualify Prospects
There isn’t a business out there that hasn’t either failed to profile its ideal customer or lost sight of that profile and taken on business they should never have accepted.  It’s part of our humanity – we make mistakes.

Customers who don’t fit our profile see little, if any, value in what we have to offer.  That’s why we have to discount to get their business in the first place.  For clarification, ‘discount’ refers to any concession made to the buyer to get their business – not just price reductions.  Concessions given have costs associated with them which means, in essence, that you’ve reduced your price.

These ‘discount’ customers will go away when you raise prices, but that’s a good thing.  They’re the ones who’ve been gobbling up huge quantities of your organization’s time and energy as well as costing you tons of money.  They need to go away so that you can devote your organization’s capacity to those willing to pay premium prices.

Provide Desired Value
All too often business owners/leaders continue to ‘improve’ their offerings to gain a competitive advantage only to discover later that their customers don’t really value those improvements.  The solution is simple, talk to your customers before you make the improvements to ascertain that they’re willing to pay for the improvement.  If they are, you’ll not only have a reason to raise prices, you’ll have a new marketing tool to attract like-minded customers to the fold.

The moral of the story is that you can, indeed, raise prices and increase your customer base.  The key is to avoid the three mistakes mentioned above.  Do that and you, like Ron Ameln and Jay King will smile all the way to the bank.  Happy selling!

Go to your website and answer the following questions as if you were a prospective customer.

• What result will I get from doing business with this company?
• What ROI can I expect on my investment?

If you find the answers to these questions on your site, kudos; you’re a rare bird – a value marketer.  What you’re more likely to see is:

• A list of the products/services your company provides.
• A company history.
• Unsubstantiated claims of how you’re better than your competitors.
• Few, if any, results-based testimonials.
• A reference to ‘affordable prices.’

Unfortunately, this information doesn’t help a prospective buyer make an informed decision.  From the buyer’s perspective, absent the answers to the questions above, yours is merely another company offering what others in your industry offer.  In other words, you’re a commodity.  And as we all know, price becomes the sole factor in commodity purchases.

One of the keys to higher prices is your ability, in marketing messages and sales scripts, to communicate the results the buyer can expect and what kind of return they’ll get from those results.  Answer these two questions and your marketing becomes a powerful magnet attracting customers that are willing to pay a premium to get what you have to offer.

Fail to answer these questions and your marketing becomes your competitors’ favorite tool – a magnet that repels your prospects and gives them a shot at the business.  The choice is yours.

Author – Dale Furtwengler

Personally I think it’s too early to tell.  Why?  One year is not a trend.  Yes the profits are impressive, but can GM sustain them going forward?  While I’m an optimist by nature I have to confess to having serious doubts that GM will continue the practices it’s currently employing.

A significant part of GM’s success (and the other car manufacturers as well) in 2011 has more to do with the cycle of the economy in which we found ourselves than any great strategic moves.  The reality is that by 2011 most consumers had:

• Adjusted to their new, albeit diminished, income levels
• Paid down a significant portion of their personal debts
• Dramatically limited their spending for more than 2 years

The result is that these behaviors created a wellspring of pent up demand.  Human beings are acquisitive by nature.  We enjoy spending money on things we want.  When we’re deprived of that joy for a year or two it becomes a craving that must be satisfied.  That’s what we saw in the automotive industry in 2011 – the release of a significant amount of pent up demand.

When demand is high, companies realize that they don’t have to offer the hefty discounts they once did, consequently they experience dramatic growth in both their top and bottom lines.  Does that mean that they’ll continue to hold their prices when demand slows?  Will their advertising during slower periods focus on the value their vehicles provide?  Or will they focus consumers’ minds on price by making it the focal point of their advertising?

If history is any indicator, and in this case I believe it will be, the car companies will revert to price competition.  In doing so, they’ll once again see declining profits if not outright losses.

My goal is not to denigrate the automotive industry; I hope they prove me wrong.  Nor am I prone to dispensing doom and gloom.  Rather my goal is to show you how easy it is to become enamored with a result without fully understanding the context in which it was created.  The resultant ‘see how great I am’ attitude can produce devastating results when there’s no basis for it.  Which I believe is the case in GM’s recent success.

The morale of this story is simple.  Before celebrating a success, take time to evaluate how much of that success was a function of the state of the economy.  More often than not you’ll find that your results are more a function of the economic cycle than brilliant strategy.

Or history repeating itself?

General Motors, recognizing that many potential buyers’ credit is less than stellar these days and that funding sources aren’t readily available, have entered the subprime auto loan business.  The goal, obviously, is to increase auto sales.  Will it work?

To me it’s another example of how the leaders of large businesses are clueless about how to grow their businesses profitably.  It’s not by making sales to people who can’t afford what you offer.  It doesn’t matter if GM charges higher interest rates to these borrowers if they ultimately default on their loans which many will.

It’s not difficult to envision a GM executive calculating the price they need to charge their dealers and incorporating the ‘interest income’ from the financing in the calculation.  And when you’re convinced that this is a great strategy, as I’m sure that GM is, you’ll be overly optimistic about the bad debt losses you’ll incur.  That’s human nature.  Yet history has proven that this optimism is ill-founded.

What should GM be doing?  Finding ways of distinguishing its cars and the buying experience in ways that buyers want.  It’s a simple matter of looking at what buyers don’t like about their cars or the buying experience and changing them to meet buyer expectations.  These changes are typically simple, inexpensive and easy to implement.  Contrast that with GM’s current strategy of taking on high risk borrowers who aren’t able to pay the original purchase price much less the higher interest rates associated with their loan.

I was wholeheartedly against the GM and Chrysler bailouts.  Why?  Between the early 70s, when the Japanese automakers began to make significant inroads to the U.S,. and the bailout, almost four decades, these automakers learned virtually nothing from their experiences.  They were:

• In denial about how poor their quality was – many of their cars required expensive repairs after only 50,000 miles.
• Felt that the American buying public owed them allegiance by virtue of their American roots.
• Blamed the unions for driving up their costs – as if they didn’t have the right to ask for productivity increases commensurate with the pay increases.

Not once did they ask themselves “What are we doing that contributes to our poor sales?”  Their subprime loan strategy seems to me to be yet another example of GM being in denial about  how they’re contributing to the lack of sales they’re experiencing.  Instead of enticing buyers who can’t afford what they offer, they should be finding ways to entice those who can.

What’s the lesson for you?  Spending time, energy and resources to attract buyers who don’t value what you offer or can’t afford it, will lead to the kinds of problems which precipitated the bailout.  Will the government bail you out?  I don’t think so either.  Avoid these missteps and you and your customers will enjoy more satisfying and profitable relationships.

I was listening to a company’s CEO/founder relate her company’s rise to success, warts and all, when she stated that when they hit $3 million in revenue they had to buy additional equipment to handle the demand.  Is that what you’d have done?

The vast majority of business people would, but I’d like to suggest that there is an alternative that makes more sense.  Yes, I’m talking about raising prices.

Whenever a company reaches its capacity it should review it’s customer list.  It’ll inevitably find customers whose margins are very low and who are so demanding that it doesn’t make sense to continue accepting their business.

If you’re looking for a quick and easy way to identify these customers just ask your staff “Who are the most challenging customers with whom you deal?”  They’ll rattle off a list so quickly your head will spin.  Here’s what you’ll find when you investigate these customers’ history:

• They’re high volume customers – otherwise why would you have tolerated their demands.
• Their margins are well below those of most of your customers, possibly even negative when you factor in how many resources are expended trying to satisfy them.
• They’re regularly demanding that you do things that are outside your normal business activities, increasing the likelihood of errors and lost productivity.
• Late in paying because of all ‘the problems’ they encounter.

Ouch!  That stings doesn’t it?

Now, let’s imagine that the increased demand for your offerings is coming from people who really value what you have to offer.  You’ve attracted them because you’re the best, if not the only company, that can do what you do.  As a result they’re paying higher prices than the customers identified above.  What will that mean for you financially?  You’ll:

• Enjoy much higher margins when you replace troublesome customers with new customers.
• Eliminate the time and energy drains on your staff thereby increasing productivity and, in essence, adding capacity to your organization.
• Avoid having to make additional capital investments which conserves cash.
• Avoid borrowing money for capital investments and weakening your balance sheet.
• Keep your infrastructure costs flat while raising margins thus increasing profitability.

Given these options, expansion or customer replacement, which would you choose?

Surprisingly, more than a few of you will still opt for expansion.  It’s tough to forego bragging rights associated with a growing customer base, isn’t it?  The reality, though, is that somewhere in the not too distant future, you’ll be complaining that running your business “isn’t fun any more.”  Why?  Because those price buyers found a lower price somewhere else.

The problem becomes even more profound if you suddenly feel the desire to sell your business.  Why?

• Your company’s profits aren’t what they could have been.
• Productivity (revenues per employee) are low compared to the industry.
• Free cash flow is marginal, if it exists at all.
• You have significant amounts of debt on the books.

As a buyer, how much would you pay for a business like that?  Indeed, would you consider buying it at all given all the unraveling you’d have to do?

Don’t live this nightmare.  The next time you feel the need to expand:

• Review your customer list.
• Fire those who are most demanding and take you outside your organization’s strengths.
• Replace those customers with your ideal customer and significantly higher prices than the old customers were paying.

It’s a much more effective way to deal with growing demand.

My initial thought was “Well that promotion wasn’t very successful.”  I know that extending the deadline for a sale, for discounts and terms, like shipping, is a common practice for many businesses, but do these businesses realize what message they’re sending to the market?  Let’s see whether you and I are getting the same messages.  Here’s what came to mind:

• The promotion wasn’t successful, what makes them think that extending the deadline will help?
• I wonder what was wrong with the offer that it didn’t produce better results.
• Whatever it was I’m not interested in learning more about the promotion.
• The more frequently they extend deadlines, the less confidence I have in their offerings without even seeing them.

Of course the opposite could be true, the promotion could have helped them achieve their revenue goals.  But then why extend the deadline?  Oh that’s right, market share.

If businesses would expend as much energy improving their profit margins as they do going after market share, we’d all be better off.  The business would be more profitable, allowing them to invest in innovative, to attract and retain talented workers and create a more satisfied, loyal customer base.

Regardless of the reason for Amazon’s deadline extension, here are the thoughts I’d like to leave with you:

• Don’t use discounts regardless of their form; they don’t generate greater long-term profits.
• If you do offer a discount and don’t generate the profits you’d hoped, don’t extend the deadline.  The problem isn’t the price.
• Shift your focus from market share to higher margins.  You and your customers will both be better off.

Imagine for a moment that you’d spent your valuable time clipping coupons for things you’d normally buy.  You keep them with you at all times so that when you’re ready to buy, you have the coupon with you.  You’re in the store selecting an item for which you have a coupon.  You begin flipping through the coupons, find the one for the item you’re purchasing only to find that it’s expired.  Ahhhhh!  It’s precisely this sequence of events that triggered the outcry.

As sellers, we’re making purchasing our offerings more difficult when we offer coupons as evidenced by the aforementioned sequence.  On top of that we’re increasing the likelihood of customer dissatisfaction.  When our customers really need what we have to offer and they’re in possession of an expired coupon, they feel like they’re overpaying.  The ultimate insanity, though, lies in the fact that we’re foregoing revenues and profits to make our customers’ live miserable.

Sellers who utilize coupons as part of their marketing/pricing strategy point to the high level of coupon usage.  Indeed, roughly 76% of consumers report using coupons ‘regularly.’  For more information on this see my blog post, [Coupons: Another Perspective].

Why is coupon usage so high when the experience itself can be so frustrating?  Consumers:

• Will take advantage of a deal when it’s offered.
• Don’t really track the time they spend clipping, sorting and updating their coupon ‘files.’
• Don’t calculate the return on investment on their time.

The fact that customers ‘regularly’ use coupons doesn’t alter the fact that you’re making your customers work harder to purchase your products/services.  If you really don’t believe that your offering is worth the price you’re asking, lower it to the levels that a consumer would pay with the coupon.

If, however, you know that your offering is worth the price, demonstrate that value by leaving your price alone and stop offering coupons.  You make your customers lives easier, avoid the dissatisfaction they experience when they’re holding an expired coupon and you enjoy higher revenues and profits.

Still not convinced?  Then answer this question, which of the following would you rather have your customers telling their friends?

• I really like (your offering), but it’s expensive so I wait for a coupon.
• I buy (your offering).  It’s a little higher, but it’s worth it.’

Which of the above statements are more likely to generate new customers for you?  The latter, because it’s an overwhelming endorsement of the quality of your offering.

Stop making your customers’ lives more difficult.  Put an end to the needless drain on your revenues.  Use those additional profit dollars to find new ways to serve your customers that add value to their lives.  Who knows, in this economy, you might just be able to hire an extra worker or two and accelerate economic recovery.

 …or self-inflicted wound?

Penetration pricing is a strategy in which a company offers lower prices to garner market share. Is this a viable strategy? If so, when will it work?

To answer these questions we need to evaluate the impact this strategy has on each of the three things that all businesses sell – image, innovation and time savings.

Image
If image is the primary factor in your buying decision, how will lower prices impact your buying decision? Imagine that you’re a fan of Belgian chocolates and serving them to your guests affords you the image of international traveler, connoisseur.  How likely are you to buy a new Nestle chocolate even if the product is better and the price lower?

Even if you never serve them to guests, if you buy them purely as an extravagance for your personal enjoyment, will you experience the same joy from the Nestle chocolate? Probably not.

This is not a condemnation of Nestle chocolates, they make very fine products.  Their image, brand if you will, is captured in their tagline “Good food. Good life.”  Implicit in that language is dependability and affordability.  That’s not the “Wow!” image of a Belgian chocolate.

With these thoughts in mind, does penetration pricing make sense, or is the company simply giving up profit margin needlessly?

Innovation
Let’s assume that you’re a huge Apple fan. You want to be one of the first to own anything it creates. Is the price going to matter to you? Absolutely not.

A simple review of the pricing of two products that have run the full cycle – VCRs and DVD recorders – show how much innovation buyers are willing to pay for innovation.  The initial buyers, innovation buyers, paid about $1,200 for a player, no recording capability and the technology really wasn’t proven yet.

Mass market buyers came in when the player/recorder was priced at around $400.  Would they have come in earlier if the manufacturers had priced the original players at $1,000 instead of $1,200?  Not likely.

Late adopters, those who waited until no one was putting movies onto VHS tapes any longer, paid $85 to $100.  Would they have entered the market earlier if the mass market price was $300 instead of $400? Again, I think not.

What does that mean for innovation companies who use penetration pricing to garner market share? They’ve foregone a lot of profit to no avail.

In an earlier blog, Samsung Gets It Right!, you got a sense for how futile penetration pricing is.  Samsung garnered 89% of the 3D HD TV market at premium prices. It waited to reduce its price until Panasonic and Sony entered the market with competing offerings, thereby depriving both of its competitors the exceptional margins it had enjoyed.

Imagine how much more cash Samsung has to fund future R&D efforts and new product launches because it avoided the temptation to use penetration pricing. Cash that can be used to maintain, or extend, its competitive advantage.

Time savings
If I’m able to save you time and energy, what’s that worth to you? Let me rephrase that question.  If I can produce results more quickly for you, is it worth more or less to you? Isn’t that what time savings is all about, getting results more quickly so that you have time to devote to other interests?

Assume that I claim to be able to get the result you desire more quickly than my competitors AND that I can do it for a lower price, are you going to believe me?  Or is your skepticism going to cause you to question my claims? And if I cause you to question them, to spend time trying to ascertain whether or not my claims are legitimate, have I saved you any time?

As you can see attempts to use penetration pricing to garner market share on time saving offerings simply confuses the market and, potentially, delays or eliminates the possibility of a sale.

It’s counter-intuitive, but penetration pricing is an ill-conceived pricing strategy that limits the profit potential of sellers and deprives buyers of the value they desire.  Prices will decline naturally as products move through the cycle from innovation to decline, as they should. All that I’m suggesting is that we don’t need to accelerate the process by using penetration pricing.

Indeed, doing so limits the ability of companies to meet their customers’ evolving needs, leaving both worse off than they would have been with a pricing strategy that reflects the value buyers get – whether through image, innovation or time savings.

Between Black Friday, Cyber Monday and the fact that retailers continue to discount heavily throughout the holiday season, it’s difficult to know when to buy.  What’s at stake?  Value for the dollar.  This is especially true in difficult economic times when discretionary dollars are scarce.

Unfortunately, instead of helping us make informed decisions, retailers make it more difficult to decide when to buy.  By making life more difficult for us, they lay open the door to tremendous customer dissatisfaction.  Their pricing strategies leave us with questions like:

• What is the true value of what I’m buying?
• How can the price continue to drop when the product doesn’t change?
• Were they trying to gouge me before?
• What happens if the price drops after I make the purchase?
• What extra work am I going to have to do to recover the price difference if I do buy early?
• Is it even possible to recover the price difference?

Is it any wonder that we feel additional anxiety in an already stress-laden season?  It doesn’t have to be this way.

It’s apparently more counter-intuitive than I imagine, but if these retailers did a better job of touting the benefits of doing business with them so that we could readily see the value, they’d generate more sales (discounts reduce revenues), they wouldn’t need as many customers to be profitable, they’d create greater customer loyalty and they’d have a clearer picture of who their ideal customers are and what they value.

Now that’s a win for everyone!

She says “…mostly what coupons allow you [the seller] to do is sell a product at a high price point to people who are brand loyal and can’t be bothered to clip coupons, while selling at a lower price point to people who care more about price, and place a lower value on their own time.”  She does acknowledge that the latter buyers aren’t very loyal.

I must say that I’ve never viewed coupons in this light.  Indeed, those of you who are regular readers know that I generally rail against any form of discounting because it cheapens the brand.  Is Ms. McArdle’s premise valid?  Let’s explore it together.

Brand Loyal Customers
Actually Ms. McArdle placed two conditions on these buyers:

• That they are brand loyal.
• They can’t be bothered clipping coupons.

Certainly buyers with high discretionary income aren’t likely to clip coupons.  As Ms. McArdle points out, it’s an extremely poor use of their time.  I agree that these buyers are not going to be affected by the existence of coupons.  As long as the brand promise is fulfilled they’ll continue to use the product/service and pay your higher price to get it.  Having said that, I can’t help wonder what percentage of ‘brand loyal customers’ this represents.

Available Data
To answer this question we need a frame of reference.  To help us in this analysis I’ve chosen three resources – Value Line, the Statistical Abstract of the United States:2011 and a March 11, 2011 Reuters U.S. article referencing a Valassis research study on coupon usage.

While researching Walmart for some earlier blog posts, I went to Value Line and discovered that Walmart defines their target customer as households with income of less than $70,000.  Frankly, I was a little surprised to find the number that high; however,  I have no evidence that contradicts Value Line’s report so we’ll go with that number.

Given the definition of Walmart’s ideal customer, is it reasonable to assume that households with less than $100,000 of income are likely to clip coupons?  Let’s make that assumption.

I realize that I am generalizing buyer behavior.  Obviously there are buyers with low household incomes that won’t clip coupons and some beyond the $100,000 range that might.  Bear with me, though.  I believe that even though we have limited data and, of necessity, are making some assumptions, the point I’m about to make will prove valid.

Using our assumption that households with income less than $100,000 clip coupons, we turn to the 2011 U.S. Statistical Abstract.  The 2011 Abstract’s most recent data, 2008, shows that only 12.5% of the households have incomes of $100,000 or more.  Based on our assumption, that means that 87.5% of households are likely to be clipping coupons.

Even if we drop to the next income level reported in the Abstract, $75,000, we’re left with 77.7% of the population using coupons.  Which coincides with the Valassis research in which 76% of consumers reported using coupons ‘regularly.’

Conclusion
What does all this mean?  To me it means that somewhere in the vicinity of 76% of brand loyal buyers are going to take advantage of coupons.  These are people who would have bought your brand anyway, but are happier doing so for a lower price as long as it only takes a few seconds to achieve that savings.

Even if the coupon usage is only 50%, do you honestly believe you’re going to gain enough price buyers to offset the discounts your giving to your brand loyal customers vis-a-vis coupons?  That’s not been my experience.

When buyers find a product/service that satisfies their needs, they tend to stick with it even though there are lower-priced alternatives available.  Stop bleeding revenues and profits while diminishing the value of your offering; stop using coupons!

More importantly, what can you learn from their experience?

Bank of America’s (BOA) latest attempt at raising revenues, charging for debit card usage, has met with a maelstrom of consumer and media attention rarely seen in the world of business.  Why such a hue and cry over a modest price increase?  Let’s take a look.

One of the key factors is that BOA is asking customers to pay for service that previously was ‘free.’  Now you and I know, logically, that nothing is truly free; any freebie is subsidized by other profit streams.  0% financing on your car doesn’t mean that the financing is free, it simply means that you’re not getting as much off the sticker price or as much for your trade-in as you’d have gotten with a 2.9% financing deal.  The same is true with ‘free’ debit card usage.  Yet, when we’re told something’s free we psychologically accept that premise and resent having it taken away from us.  Why is that?

In part, we assume that because the debit card was free it must not have cost BOA much to offer the service.  This may or may not have been true, but that’s the impression BOA gave us by offering the free service.  Continuing with this line of thought, if it didn’t cost much to begin with what’s the justification for the price increase?  We’re not getting any greater value than we did before and if the costs were miniscule to begin with what’s the justification for the increase?  Absent increased value or a cost justification we, as consumers, are not inclined to pay for something that was once free.

Now let’s contrast that with an modest increase on an already modest fee and see how we’d react.  Let’s assume that you’d had been paying $4 a month for the debit card and it went to $5, the fee that BOA is proposing, would you stop using your debit card.  Probably not.  Why?  You know that there are costs associated with any service and those costs go up over time so you’d expect a periodic increase in the price you pay, right?  Of course you would.  So it’s not the amount of the fee that’s a problem, but the fact that the service was free.

One of the interesting aspects of this whole saga is that BOA is only one of a significant number of banks proposing these fees, yet Bank of America has taken the brunt of the public’s disgust with these fees.  Why?  The answer, I believe, lies in BOA’s recent history.

BOA’s leadership made a lot of bad business decisions during the past few years.  BOA bought the failing Merrill Lynch brokerage firm that was heavily laden with subprime mortgages.  That purchase was on the heels of its earlier acquisition of Countrywide Financial, another heavy player in the subprime mortgage market.  These poor decisions show up in BOA’s numbers vis-a-vis the swing from a $6.2 billion net income in 2009 to a $2.2 net loss in 2010.

Combine that with the fact that BOA was one of the larger TARP recipients and we see consumer sentiment that, in essence, says “We don’t fee that we should pay for your mistakes.”  The fact that BOA’s TARP funds have been repaid with interest does not increase the buying public’s desire to help a struggling company.
What lessons can we take from BOA’s experience?

• Don’t offer freebies to your customers – they won’t value them and definitely won’t pay for them later.
  Don’t subsidize one offering with the profits from another offering- it confuses buyers and makes future pricing changes more difficult for them to accept.
• Don’t raise prices without an increase in value – while customers may accept a price increase to offset rising costs, they often doubt the validity of your cost increases.
• Don’t expect consumers to pay for your bad business decisions – they’re not that magnanimous.

As always, I look forward to your comments highlighting your experiences and any challenges you may have to my thoughts.

Indeed.  I can’t help but wonder whether AT&T has fallen victim to Mr. Wilde’s fate.

I’m sure most of you have seen the U-verse ad in which the parents of two children, a boy and a girl, are trying to decide which of the kids should gets to choose the final U-verse recording slot.  The ad even has the parents proclaiming who their favorite child is.  Let’s break this ad down into the messages that are being sent.

• U-verse has limitations, otherwise why would a choice be necessary?
• The parents are placing their interests ahead of their children’s.
• It’s okay for parents to discuss their children’s merits/shortcomings publicly.
• Declaring a preference for one child over another, again publicly, is “fun.”
• A child’s self-esteem isn’t of concern to his/her parents.

Can anyone enlighten me as to how this ad is going to make me want to use AT&T’s U-verse?

First, AT&T’s U-verse purportedly has greater recording capability (four shows at once) than any of its competitors.  If that’s true, then why would you focus buyers’ attention on the limitation instead of the advantages?

Second, even if we give AT&T the benefit of the doubt by assuming that the rest of the ad was intended to be tongue in cheek, who among us hasn’t taken a hit to our self-esteem by comments made by others?  Particularly painful are comments made by parents, whether made in jest or during times of stress.  This ad reminds us of those times and causes us to relive the associated pain.

Finally, the ad has the potential to perpetuate this kind of parental behavior in people who grew in households in which they, as children, were subjected to this kind of emotional pain.

What can the rest of us take away from this AT&T ad?

• Focus on the value you provide.  With U-verse it would be the expanded recording capabilities.
• Attempts at humor, especially tongue in cheek types of humor, can and often do create a backlash of emotions that you didn’t intend.
• Examine the social implications of your messages.  Are they uplifting or denigrating?

Finally, let’s not lose sight of the fact that buyers aren’t buying clever, they’re buying the value your offering affords.

Here are a few findings that Mr. Garcia cites:

• Disney’s four, five and seven-day passes are its most popular.
• Single-day tickets account for only a small percentage of total ticket sales.
• Single-day ticket prices are approaching $100.

As Jason Garcia astutely observes, by focusing its price increases on longer-term tickets, Disney is able to increase revenues while slowing the rate of increase on single-day ticket prices.  Why does this make sense, or does it?  Let’s see.

What is it that you’re really buying with the longer-term tickets?

• Flexibility
• A more leisurely pace
• Greater variety
• A more enjoyable experience

Flexibility
Multi-day passes allow more flexibility in your scheduling.  Typically you’re traveling some distance to get to Walt Disney World so you’ve planned an extended stay to make the travel worthwhile.  You also want to see some of the other attractions in the Orlando area.  Multi-day passes allow you more flexibility in accomplishing all of these goals.

Greater variety
The flexibility outlined above allows you to enjoy greater variety on a day-to-day basis.  Instead of having to focus all of your energy and attention on getting the most of your Walt Disney World visit and making it feel more like a marathon than a vacation, you can blend in other activities that offer a broader array of experiences for you and your family.

Leisurely pace
Already exhausted from your travel, you don’t have to rush headlong into the rigors of a theme park visit.  You don’t have to cram everything into a day.  You have time, each day, to go back to your room to read, take a nap and keep the little tykes on something approximating their routine while remaining confident that you’ll have time to see everything you want to see.

Enjoyable experience
When you combine the flexibility, additional variety and more leisurely pace, you can’t help but have a more enjoyable experience.  That’s the value of the multi-day passes.

What does that do for Disney?  It allows them to generate:

• More repeat business.
• Higher average ticket prices.
• Higher margins.

Repeat business
Customers who have an enjoyable experience are more likely to return time and again.  Higher prices do not deter buyers who had a pleasurable experience.  Instead they say “It was worth it!”

Higher average ticket prices
With each day that’s added Disney enjoys higher revenues per customer.  Revenues grow without having to increase the size of the customer base.

Higher margins
The customers who value the flexibility, variety and leisurely pace the multi-day tickets afford aren’t likely to spend every waking hour at Walt Disney World.  They’re not trying to cram everything into a compressed timeframe.  They’re going to meander in and out and, in all likelihood, won’t visit every day that their ticket affords.  The result?

Revenues per customer hour spent at Walt Disney World goes up dramatically, yielding higher margins on multi-day tickets.  Staff scheduling can also be normalized for the season allowing more effective allocation of labor resources.  Don’t you love strategies that produce multiple benefits?

I don’t know about you, but this looks like a Yoda type strategy to me.  Kudos to Disney.

Conventional wisdom is that you need to know your competitors’ pricing.  My question is “Why?”

The answer I get most often from business owners/leaders is that their company’s pricing has to be competitive.  Then I ask “So what is a competitive price?  Is it 10% more, 10% less, in line with your competitors?  What does it mean to you to be competitive?”  Interestingly few have a concise answer.  They simply feel that their price needs to be close to what their competitors are charging.

Lack of a clear definition of ‘competitive price’ isn’t the only problem.  There are a number of flaws in the ‘conventional’ wisdom regarding the value of pricing intelligence.

First, it overlooks the fact that we tend be more critical of our offerings than our competitors’ offerings.  We know where the warts are in our offerings.  They’re less visible when viewing competitors’ offerings.  It’s difficult to get fair compensation for the value you provide when you’re consistently discounting that value.

Second, most of your competitors’ don’t have any better idea of how to quantify value (dollars/cents) than you do which means that they, too, have defaulted to ‘industry pricing.’  How is gathering pricing intelligence from people who don’t know any more than you do going to help you establish your prices?

Third, if you have an effective business strategy – one in which you’re providing something the market wants or needs that it isn’t getting – how is your competitors’ pricing relevant?  There is no frame of reference among your competitors.  You’ve got that market entirely to yourself.

Fourth, gathering competitive pricing intelligence focuses the seller’s, and ultimately the buyer’s, attention on price instead of value.  It’s value that the vast majority (over 85%) of buyers want, not the lowest price.  The reason why they seem so price conscious is that’s where we’ve focused their attention.

Finally, most businesses have taken on business that they shouldn’t have.  Whether it’s because they needed the cash or they thought something was a good idea but it didn’t pan out, they’ve taken on business that they shouldn’t have.  To get, and retain, that business they’ve discounted their prices.  By using their pricing as a frame of reference you’re paying for their mistakes with your pricing.  Ouch!

Getting back to the original question Is gathering your competitors’ pricing information a worthwhile endeavor?  I have to say ‘No.’  Indeed, I encourage my clients NOT to look at their competitor’s pricing.  It helps them avoid the pitfalls outlined above.  Hopefully these insights will help you as well.

The U.S. Department of Transportation has issued new rules for the airline industry including price disclosures and cash penalties for a variety of airline misadventures.  The truly sad part of this, or any story on regulation, is that regulation is a self-inflicted wound.

Companies invite regulation when they continuously ignore the concerns of the buying public, then bemoan the high costs of complying with these new regulations.  Finally, they wonder why that same public bristles at future price increases to ‘cover higher costs.’

How Costly?
The cost to the airline industry won’t be known for some time, but they’re not alone in their ‘quest’ for further regulation.  The Sarbanes-Oxley act was the result of the CPA profession’s failure to adequately monitor itself.  This act cost operating companies between $2 million and $5 million depending on their size.  Some CPA firms have seen the cost of their peer reviews quadruple as a result.  What we see with Sarbanes-Oxley is what’ s typical of regulation, there are no winners.

The Alternative
What most companies don’t realize is that customer complaints are an opportunity to either establish or strengthen their brand image.  Indeed, years ago I created a program that taps annoying customer behaviors to identify areas of customer dissatisfaction.  Dealing with those effectively helped clients:

• Differentiate themselves.
• Enhance their brand.
• Create great customer loyalty.

The interesting thing is that the solutions to these customer problems are almost always simple, inexpensive and easy to implement.  Indeed, most were implemented in a matter of days and carried a cost of a couple of thousand dollars or less.  Contrast that to the $2 to $5 million dollar price tag of Sarbanes-Oxley and you can see why it’s in your best interests to deal with customer dissatisfaction quickly and effectively.

Beyond Cost Savings
The real value of regulation-avoiding strategies isn’t in the cost savings, it’s in the power of a brand that attracts customers who are willing to pay handsomely to avoid the headaches they experience with your competitors.  Effect this brand strategy well and you enjoy greater customer loyalty at much higher prices/margins.

Lead the Industry
Don’t wait for the problems in your industry to become so severe that regulation is looming at your doorstep.  Develop strategies to remove dissatisfaction from your customer experiences.  Lead by example and reap the rewards of higher prices and greater customer loyalty that go to the innovators in any industry.  Then take an active role in your industry association and use your results to help the industry avoid the high cost of government regulation.  You’ll be helping yourself, your customers and your industry enjoy greater success.

P.S. Don’t forget that the aforementioned strategy affords great PR opportunities, one of the least expensive ways of building your brand.

Author – Dale Furtwengler

These clients were told that they had access to a broader array of services than they’d had previously.  Care to guess what kind of reaction he got?

His clients were incensed.  Having access to more services doesn’t mean that they need or want them so why should they pay more for the services they do value.

Let’s be real; the acquiring firm has a fee structure higher than that of the firm they acquired and they wanted to have all of their clients on that same fee schedule.  That’s a worthy goal, but raising prices without adding value won’t get you there.  What should they have done?

They should have:

• Created bundles of offerings that incorporated some of the new services
• Sat down with each client and made them aware of those bundles
• Discern the client’s interest in those bundles
• Priced the bundles to achieve the higher fee structure desired

Why would this have worked better?  This approach:

• Offers clients a choice
• Identifies their interests
• Allows customization for those interests
• Demonstrates the value they’ll receive
• Enhances the relationship

Were any of those accomplished with the tactic employed?  Indeed, the opposite occurred.  These clients:

• Didn’t like having a new fee structure imposed upon them
• Became resistant to any new services
• Felt taken for granted or deemed unimportant to the firm
• Resented having to pay higher prices without any value being added
• Are likely to search for a new firm

Which result would you prefer?  The next time you’re in the mood to raise prices, make sure that you’re demonstrating higher value in ways the customer/client appreciates.  Remember, access does NOT equal value.

Author – Dale Furtwengler

One of the entrepreneurs introduced an extremely powerful pogo stick that selling well at $600.  He wanted funding to go to the mass market.  If you’d have been one of the sharks, how would you have responded?

The sharks demonstrated not only their business savvy, but their integrity.  They unanimously declined to participate.  Their rationale?

They said that the mass market route was the wrong way to go.  That the entrepreneur should double his price and remain focused on his brand image, extreme sports.  The pogo stick was powerful enough to allow the user to the kinds of flips and twists one would expect to see in skateboarding competitions.

All of the sharks agreed that the mass market would dilute the brand image and make this product just another pogo stick.  Based on this analysis the sharks said that there was nothing they could do to enhance the entrepreneur’s success.

Have you made the mistake that this entrepreneur almost made?  Have you diluted your brand by marketing to the masses?  If so, it’s not too late to change.  Refocus on your niche market and adjust your pricing upward (the sharks said “double”) to reflect the value these customers get from using your offerings and stop wasting time, energy and money trying to satisfy people who don’t value what you have to offer.

Author – Dale Furtwengler

…or another marketing gimmick?

Hyundai recently announced a trade-in guarantee.  Buyers of a new Hyundai will know immediately what trade-in value they’ll receive on their next purchase.  Sounds great.  Is it as good as it sounds?  Let’s see.

We have to start with the obvious premise that car dealers have to make money or they won’t be in business.  Outside of the manufacturer’s discounts which dealers don’t typically control, they make their money through:

• Margin on the new car sale
• Margin on the used car sale
• Financing costs (interest)
• Extended warranties
• Repair services

There’s no guarantee that buyers are going to bring their cars back for repairs especially when those cars are outside the warranty period.  A Consumer Reports survey from 2007 showed that 75% of the 8,000 respondents did NOT buy the extended warranty.  That leaves dealers with basically three options for making money on a new car sale – the margin on the new car, the margin on the trade-in and the financing fees.

Hyundai, with its guarantee, has opted to limit its income potential on the used car trade-in.  First, it has to provide a reasonable trade-in value or buyers will quickly see through the facade.  Buyers are so much more astute today because information is so readily available.

Second, Hyundai is going to attract buyers who don’t maintain their cars well.  They’re the ones who will benefit most from the pre-established trade-in value, theoretically.  Buyers who maintain their cars well will typically negotiate for higher trade-in values because they can.

That leaves Hyundai with the margin on the new car sale and financing costs to generate the profits they need.  If, as I suspect, owners of the poorly-maintained vehicles are the ones to avail themselves of this guarantee, the dealer won’t be able to come down off the sticker price as much as he would otherwise.  The dealer may have more latitude in negotiating the sticker price if interest rates are high enough to provide additional profits there, but that depends heavily on where the economy is and what interest rates exist at the time.

When examined in this light, we find is that the ‘guaranteed trade-in value’ is a marketing ploy.  The deal Hyundai buyers get in the future won’t be much, if any, different than the one they’ll get today.

What’s the moral of this story?  If you’re being offered a guaranteed price, rate or buy back program that’s years into the future, there are aspects of the deal that allow the seller to circumvent the guarantee.  Don’t buy into these programs.  Make the best deal you can today and position yourself for another in the future.  Companies cannot accept higher levels of risk without a safety net of their own or they won’t be in business to honor their original guarantee.

Author – Dale Furtwengler

If not, what are we really buying?

To answer these questions we need to define loyalty.  Loyal customers:

• Pay a premium to get what you have to offer in good times and bad.
• Stay with you even when you make a mistake (assuming your remedy it).
• Regularly refer you to others.
• Offer you insights into how you can serve them more effectively.
• Provide candid feedback on your performance when asked.

Think about the vendors you use.  Which of them would consider you a loyal customer?  More importantly, to which of them do you feel loyal?

Now let’s assume that one of these companies offers you a loyalty/rewards program.  What’s you’re reaction?  Are you grateful or do you begin to question whether you’ve overvalued your prior experiences?  Maybe you were offended at the idea that your loyalty could be bought.

For me, the reaction is a combination of:

• Just what I need – another rewards card to aggravate my sciatica (I carry my wallet in my hip pocket).
• Are they nuts?  I was happy to pay their price.
• I wonder how the experience is going to be affected by the rewards program?

Customers of companies offering rewards programs often experience:

• Less service.
• Smaller quantities.
• Or more frequent price increases.

Why?  Because the reality is that the rewards/loyalty discounts don’t increase your or my demand for the offering.  I’m only going to eat Italian, Chinese or Thai food so often during the month.  My clothing doesn’t wear out more quickly.  So exactly what is it that these rewards programs buy?  The same real estate that you purchased previously.

That’s right.  You’ve just given back the revenues and profits you generated while WOWing.  Now you’re trying to recoup those losses by buying back the real estate you just gave up.  How?

You’re likely to:

• Cut back on service.
• Reduce quantities.
• Or raise your prices more frequently moving forward.

It’s counter-intuitive, but loyalty/rewards programs often destroy the WOW effect that won your customers loyalty.  Don’t risk your brand reputation.  If you’ve established a loyal customer base, keep doing what you’re doing.  You and your customers will both be better off.

Author – Dale Furtwengler

• Expand into new markets to stimulate growth.
• Dramatically increase your investments in inventory and facilities.
• Accept 15% to 20% lower margins.

You’d probably tell me to take a flying leap.  Rightfully so!

Yet that’s the strategy two retail behemoths, Walmart and Target, have chosen by entering the grocery business.  According to Value Line reports grocery gross margins have been in the range of 22.5% to 23.7% for the past several years while other retail operations have posted gross margins of 26.5% to 27.2%.  Indeed, the grocery margins have been dropping while other retail margins have been rising giving rise to a 20%+ spread between the two margins.

Combine this information with the fact that the grocery business has long been a low margin business with net margins (operating margins) running in the low to mid single-digit range for decades and I can’t help but wonder “What were they thinking?”

I’m a big fan of growth.  And while I don’t consider myself lazy, I don’t believe in taking on work that’s going to pay me less than I’ve been making previously.  Indeed, much of my success as a consultant comes from showing my clients how to grow their profits without working nearly as hard as they did previously.

If you like that philosophy then here are some tips on growing your business:

• Look first at where you have a decided advantage over your competitors.  Why do buyers choose you over your competitors?
• Determine which of your offerings are most profitable.
• Decide what it is about those offerings that your customers value – that cause them to want to pay a higher price to get that offering.  Remember you’re selling innovation, image or time-savings or some combination of the three.
• Determine what other purchases these buyers typically make, how much they’re willing to spend on these items and what margins you can expect from selling these items.
• Finally, ask yourself “How does this type of offering blend with our strengths – our competitive advantage?”

As you work your way through the list above, keep in mind the things that your customers enjoy about shopping with you.  If it’s image, then remember that image is all about how we feel about ourselves.  Atmosphere can definitely enhance or diminish the buyer’s self0-image.  If your atmosphere is bright and cheerful, your customers will experience a lift in their mood and some joy in what might otherwise have been a challenging day.

Similarly, a warm, cozy, welcoming atmosphere might provide an emotional respite from the chaos so many of us experience these days.  Sprinkle in a few words that give the shopper a reason to laugh and you’ll have won a friend for life.

If you want to take the experience a whole new level, teach your sales staff how to recognize and recall your customers’ names and preferences.  When people remember us we feel good about ourselves.  We have a sense that we’re special.  If we weren’t the person wouldn’t have any reason to remember us?  Here’s an experience I had.

Several years ago my brother and his wife took my wife and I to dinner.  We stopped in the bar to have a couple of drinks before the meal.  Six months later we went back to that restaurant and the bartender said “You like VO and seven.”  If blew me away to think that this bartender had trained his memory to recall a customer from a single visit six months earlier.  After that I looked forward to seeing this bartender whenever we went to the restaurant and I didn’t mind tipping him a little more for having put forth the effort to remember me and my preferences.

You can see that it doesn’t matter what business your in, people are looking for the experience that makes them feel special, feel valued, feel cared for.  Another way to make your customers feel special is to solicit, preferably in person, their input into your future business plans.  When considering a new line of products or services say to them “I’ve been approached to offer this ______ line and I can’t quite make up my mind whether or not it’s something my customers would enjoy.  I’d really like your opinion.  Would you mind giving me your honest assessment?”

This simple technique will help you create a bond with your customers that will be hard for your competitors to break.  Indeed, customers will drive out of their way to shop at your place because they feel valued.

Similar results can be obtained when you recognize and satisfy the desires of innovation and time-savings buyers.  It’s all about the experience you create.

I’m sure some of you are thinking “These are good ideas, but we just don’t have time to implement them.”  My question to you is “Why don’t you have the time?”  My guess is that your spending a great deal of time trying to retain customers who don’t really value what you offer.  Let go of those customers.  Better yet, send them to your competitors and let those customers waste their time.  Then use that time to enhance your ideal customers’ experience.

Remember, a company that’s able to get 20% higher prices needs 20% fewer customers, smaller inventories and smaller facilities to generate the same revenues and higher bottom line profits.

The next time you feel compelled to grow, grow up!  Grow into higher margins so that you’re not working harder to make less.

Author – Dale Furtwengler