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Do You Get What You Pay For?

In Robert Cialdini’s book “Influence: The Psychology of Persuasion” he talks about a friend who had a jewellery store in Arizona.

She was having trouble selling some turquoise jewellery.  Finally she decided she had to clear the stock and left a note to her staff to mark everything down to ½ price.

When she returned after a business trip she was delighted to see that all the jewellery had been sold.  She was shocked, though, to discover that, because the employee had read the ½ as a 2, the entire collection had been sold at twice the original price!

At first it seems incredible that increasing the price actually increased sales.  However if you look at the psychology behind it, it follows our natural inclination to believe “you get what you pay for”.

In this case, her customers, mostly well-off holiday makers were using a standard principle “expensive = good”.  So the customers who wanted “good” jewellery, saw the turquoise pieces as more valuable and desirable when they were twice the price.

Price alone indicated quality and a dramatic increase in price led to a dramatic increase in sales.

Most business owners believe that lower prices will mean more sales.

However this is not always true.

Think about some of our leading brands – Pampers, Coca-Cola and Fairy Liquid for example. They’re all market leaders in their sectors and they’re all more expensive than other brands.

Are you selling your stuff too cheaply?

The problem with under pricing is that you have no margin to provide exceptional customer service and you cannot market your products effectively because there is not enough profit in every transaction.

In a small business you can’t compete with the big boys on price – you simply do not have their buying power.  You have to differentiate yourself some other way – and you have to charge a premium price for it.

At the same time you have to deliver amazing value – you want your customers to love you.

The biggest problem is overcoming that voice in your head saying “I can’t possibly charge more”.  Why not?  Who says?  Have you tested higher prices?  What extra value can you offer to offset a higher price?

How do you know what to charge in the first place?

Do you look at your costs and add on your margin?

Do you look at what your competitors charge and charge approximately the same?

Do you look at your most expensive competitor and your cheapest competitor and charge somewhere in between?

Or do you actually test different prices to find out which is the most profitable?

Invariably I recommend that my clients increase their prices and at the same time tell their customers why they are different and why they should do business with them.

At the most basic level if you put up your prices by 5% you will probably add 10% – 12% to your bottom line. Will such a small price increase really lead to you losing 10% of your customers? My experience tells me that you’ll probably lose 1 or 2 at the very most.

Yes I have heard lots of reasons why you can’t charge more – especially today.  You may even be surprised that I am talking about increasing prices given the current economic climate.

However today more than ever it is vital that you charge a fair price – and use the extra profit to deliver exceptional value – because selling too cheap will harm your business.  Try it – test different prices on certain items – you may be pleasantly surprised.

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The Power Of Premium Products

When the subject of premium products comes up most people think they only relate to exclusive product sectors and top end businesses but that’s not the case.

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Premium products can be found in all  types of businesses.

Now in some instances they may be dressed up with exclusive sounding titles such as “Platinum service”,” Gold Standard” “Premier Club” etc but the fact is that premium products can be found in the most everyday sorts of businesses but they can have a remarkable impact on sales and more importantly on margin. The great thing is they often entail no extra effort.

So what is a premium product?

Quite simply it is your standard product which you’ve added value to in some way. It may be that the packaging and presentation of the product has been upgraded, you may have upgraded the functionality in some way or perhaps it has more high quality ingredients in it.

A good example of premium products is currently being demonstrated by the supermarkets. They all have premium ranges these days. Sainsbury’s call it “Taste The Difference”, Tesco call their range “Finest” while Asda call their’s “Extra Special”.

Or take a typical restaurant. Everybody has a specials menu and the items on the specials menu are always more expensive. The ingredients may be a bit more fancy but the price will be a lot more fancy.

Now I can’t claim to know the figures but while the cost price will be a little bit more, the margin will be significantly higher than on the standard dishes.

Now considering that we’ve been going through tough economic times for the last few years, you might think that there is no place for premium products.

But you’d be wrong.

The fact is that something like 20% of consumers will regularly pay more for what they perceive to be a superior product. All you have to do is work out how you can add value to and upgrade your standard product so that you can offer it as a premium product.

A little while back I was working with a removals company.

Now you might think that there’s no scope for a premium product in the removals business but there is. We created the “Reassurance Plus” product by using more robust packing cases, by having a more comprehensive insurance plan and by enhancing the unpacking service in the new house. The price of “Reassurance Plus” is around 26% more than the standard product and the margin nearly  40% more. And yes somewhere in the region of 20% of customers take it up.

My wife is a chiropractor. Chiropractors have recently twigged that they can charge more for appointments at certain times of the day. Early morning, lunch time and in the evening are outside of the standard opening hours but are more convenient for people who work during the day. While the service is exactly the same, a premium price can be charged for these times of day.

The other thing about premium products is that it’s not a hard sell. You simply make the customer aware that you have a premium product and the difference between it and the standard product and then leave them to choose.

Another useful technique is to create three levels of service –  gold, silver and bronze versions of your product. The thing here is to make sure that your existing product is the bronze level. Human nature being what it is the majority of people when faced with a choice between three options will go for the middle or silver option. So if your existing product is the bronze level you will get a massive uplift as the majority opt for the silver version and a few will actually go the whole way and buy the gold version.

So look closely at your own business and decide how you can add value to your product or service and offer gold and silver versions.

Every time someone buys anything other than the basic version, you’re making more money. You may well be very surprised at the difference it makes to your turnover and more importantly your profit.

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Pricing Strategies For Successful Businesses

What to charge for your services and products is one of the biggest issues that business owners face.

The standard response is to under-price in order to beat or be cheaper than the competition.

Your pricing is vital

The fear of losing customers – being judged as too expensive often stops businesses from charging what they should for their products and services.

Charging too little can and does cause businesses to go under.

Often I hear business owners say things like, “I can’t charge more than I already am” or “ if I put up my prices I’ll lose customers“. There’s no doubt that the internet has caused price deflation. It’s so easy and quick to compare prices on line and internet sellers always have an overheads advantage over traditional retailers operating from a bricks and mortar premises.

But when you look around, chances are you will find someone charging more than you are who is obviously thriving.

When it comes to setting your price, there are some simple do’s and don’ts you should always follow.

Don’t lower your price to win a bid.

The price you operate at currently is the price you’ve calculated that will generate the profit you want and need from your business. If you start cutting your prices to win a bid you will always be operating at a margin you’re not really happy with. And what happens when something goes wrong? You won’t have the margin available to put things right.

Understand the impact of promotional pricing

While I’ve said above that you shouldn’t cut your prices to win a contract, that doesn’t mean that you shouldn’t offer promotional deals to win new business. I always encourage clients to offer special offers to win new customers and that they shouldn’t worry about margin on the first transaction. After winning the customer via the special offer, you have the opportunity to build the relationship and add value to the customer so that when your prices go back to normal he is no longer making his purchasing decisions based on price.

However if you intend to offer deep discount pricing on an on going basis, you need to be aware of the impact of discounts on margin and how much more you have to sell to stand still.

As a rule of thumb if you cut your prices by 10% you will have to sell over 30% more to make the same profit.

Do test out different prices and price strategies.

Instead of picking a random price, you must be aware of what comparable products are selling for but remember it isn’t always the cheapest product that generates the largest number of sales or the most profit.

In certain markets customers will equate price with quality. “Reassuringly expensive” sums it up. This gives you the opportunity to raise your prices and potentially increase your sales at the same time.

You should take the opportunity to test out a number of pricing levels and find out which one generates the most profit.

No matter what you do, you must consider your pricing strategy very carefully in order to not only increase your profit but help you stay in business for the long haul.  Don’t be afraid to try out different pricing strategies. Raising your prices just 5% will have a huge impact on your bottom line.