Pricing Strategies for Small Business. Andrew Gregson

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      Table 2 shows that driving sales volume is not as powerful a path to profit as increasing prices or reducing variable costs.

      However, not all hamster cages are created equal. There was a business model in Vancouver, British Columbia, whereby all the products sold at rock bottom prices. The markup from landed cost (invoice cost plus shipping and handling, duty and all other costs attached to get the product onto shelves) covered the overhead and staffing.

      The company profit component entered the picture only when staff hit very high sales targets that triggered a sales bonus from the manufacturer. The management had focused their time on negotiating these large bonuses and on driving the large volumes. While from the outside it looked like the business merely spun its wheels, in fact the owners had found a unique path to profit.

      You hate your customers

      Where price has been the sole focus of the company, it will attract only the most cost-conscious customers. These are the customers who want a discount on every item and ask for a discount even when the product is free. These are the customers who drive you crazy because they want a Cadillac job but only want to pay Pinto prices. These are the customers you hate to see coming through the door.

      This type of company attracts only the price-conscious customers who do not really care about the quality of the job or the value the owner places on training employees, longevity in the business, or value-added features. You, as the business owner may care deeply about these features, but these customers place zero value on them.

      What would your company be like if there was never any squabbling over prices and every customer beamed at you as they handed over a check? How would your staff react to being treated with respect for a job well done? What would the impact be on your reputation in the community?

      Your company has a reputation for high prices

      If your company has generated a reputation for high prices but has not successfully communicated the value to the customer, who sees only the sticker price and none of the benefits, you could have a problem. Unfortunately, this customer complains to his or her mother-in-law who mentions you to someone else and the ripple effect begins. Then, too few customers consider buying from your company and the business starves. This is the terror that stalks most businesses.

      Summary

      Your prices are probably too low if:

      • Your company does not generate a profit and a liveable wage for the owner

      • You hate your customers because they beat you up on price every day

      • You get every job on which you bid

      • You just spin on the wheel like a hamster but don’t create profit

      Your prices are probably alright 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’s return on investment is better than that of a bank account

      • The bids on jobs are planned to leave no money on the table

      • The company loses a pre-determined percentage of jobs to lower bids

      In the appendices you will find calculations to help you decide whether, in your business, the problem of low profits is the fault of low prices or some other factor.

      The next chapter concerns itself with existing pricing methods, how they work, and their downfalls. After that, the balance of the book is concerned with ways to raise prices by showing real and demonstrable value in what your company offers.

1. Baker, Ronald J. Pricing on Purpose: Creating and Capturing Value. John Wiley and Sons Inc. Hoboken, New Jersey. 2006