Pricing 101: your pricing strategy

Pricing is the most important aspect of your business. No other factor has a higher impact on improving profits. A 1 percent improvement in price optimization results in an average boost of 11.1 percent in profits. That’s no small change.

The following are methods commonly used when determining how to price inventory. Read through these pricing options and compare them to how you currently price items in your dealership. Keep in mind the services your dealership provides when trying to match the best method for you moving forward.

Value based pricing: It’s all about the customer

To consumers, price is a number of how much they value what you are selling. For example, if I needed a new winter hat, I could get one from the local Goodwill store for a dollar, or I could go to Macy’s and buy one for $25. If I only cared about covering my head, Goodwill would win, but since I care about my fashion sense, Macy’s wins. A customer’s willingness to pay is contingent upon the value he or she places on the product desired. Essentially, value based pricing cuts through the red tape of this scenario to determine the true willingness of a customer to pay for a particular product.

Unfortunately, the most common pricing strategies and methodologies forget about the customer. Instead, people in charge of pricing justify price points based on internal reasons or simply adopting existing market prices. Newsflash: customers don’t care how much something costs you or your competitors to make. Customers want to know how much value they are receiving at a particular price.

Value based pricing requires a lot of research. But it allows more interaction between you and your customer. Plus, unlike pricing done by market norms, this method focuses on isolating qualities that distinguish your product from a dozen similar products on the market.

Value based pricing models utilizes customer data, as well as breakdowns of the relative value of different features within your offering. You’ll also need to conduct an analysis of competing goods, because once you have the data, you’ll want to know the other options consumers have open to them. In the end though, you have the greatest amount of data to make an informed decision about your profit maximizing price.

Pros of value based pricing

1. It helps you develop higher quality products.

Value based pricing not only determines a more accurate price for the end product, but the process will also benefit your business. Taking on a consumer perspective will also help you discover what customers are really looking for. Products and features will be driven by consumer demand, which raises perceived value, thereby resulting in a higher price.

2. It allows you to provide phenomenal customer service.

Much of the customer data in value based pricing is collected through customer surveys or interviews. In past newsletters, we have stressed the importance of building relationships with customers and providing them quality customer service. Your customers will perceive that you are providing the best service available and building repeat business instead of a one-time customer. The customer will trust that you are providing the most bang for his or her buck.

Cons of value based pricing

1. It takes time and resources.

The method takes time; both while building relationships with customers and researching competitors’ prices and services.

2. It’s a science, just not an exact science.

Value based pricing is more of a process that requires consistent dedication, not just a “set it and forget it” mentality. Think about it, willingness to pay differs between different customers, regions and even offers. A 100 percent accurate prediction is impossible, but we can get pretty darn close.

Summary: Value based pricing should be a part of almost everyone’s pricing strategy. When done right, value based pricing provides increased opportunities to provide customer service and motivates you to provide a higher quality product.

Cost plus pricing: The oldest and simplest method of setting prices

Cost plus pricing is the simplest method of determining price, and embodies the basic idea behind doing business. You buy something, sell it for more than you spent buying it (because you’ve added value by providing the product), and the difference between your price and costs equals profit.

A lot of companies calculate their cost, determine their desired profit margin by pulling a number out of thin air, slap the two numbers together and then stick it on a couple thousand widgets. It’s really that simple. This method involves very little market research, and also doesn’t take into consideration consumer demands and competitor strategies.

Pros of cost plus pricing

1. It takes few resources.

Cost plus pricing doesn’t require a lot of additional market research. Cost of product is something businesses are mostly aware of by adding up different invoices, labor costs, etc. Businesses can then take the total costs and place a margin on top of them that they believe the market will bear. Cost plus pricing is especially helpful when you have no information about a customer’s willingness to pay and there aren’t direct competitors in the marketplace.

2. It provides full coverage of cost and a consistent rate of return.

As long as whomever is calculating the costs per item is adding everything up correctly, cost plus pricing ensures that the full cost of the product is covered, allowing the mark-up to generate a positive rate of return.

Cons of cost plus pricing

1. It’s horribly inefficient.

The guarantee of a target rate of return creates little incentive for cutting cost or for increasing profitability through price differentiation. This inward facing approach discourages market research, including watching your competitor’s prices. Plus with no research, you have minimal data on your customers’ perceived value of your product.

2. It doesn’t take into account consumers.

Perhaps the biggest downfall of cost plus pricing is that it completely disregards the customer’s willingness to pay. To make money, a customer must be involved. They’re the most important part of selling anything, so any pricing strategy that doesn’t take customer value into account is creating a vacuum that’s sucking all of the profit out of the business.

Furthermore to be blunt, customers don’t care about how much something cost you. They understand there are costs associated with doing business, but consumers care more about how much value you’re providing.

In summary, cost plus pricing isn’t ideal for most businesses, unless you truly cannot spend some extra time on the most important aspect of your business – your customers.

Competitor based pricing:  logical, but ineffective

Competitor based pricing is a lot like a bad case of plagiarism in a college class. Because you don’t want to do the work yourself, you look at your competitors’ prices for similar products, and set your prices similarly.

Imagine stacking all of your competitors on a totem pole with the most premium or luxury brand on top and the bargain brand on the bottom. You then decide where on the pole you fit, place yourself in there and set your price accordingly. This is not the way to do business.

Pros of competitor based pricing

1. It’s fairly simple.

If you’re in an industry with even one or two direct competitors, you can implement a reasonable competitor based pricing strategy. In most industries, marketing and product managers will then have to do relatively little research to find a price.

2. It’s low risk.

It’s rare to royally screw up using this form of pricing, and chances are if your competitor has never filed bankruptcy, neither should you.


Cons of competitor based pricing

1. It leads to large missed opportunities.

You will miss the opportunity to work closely with your customers and provide them true customer service if you just sell a product without any extra perceived value. You will likely lose profits and not take advantage of improving your product or business. Maintaining a lower price than your competitors isn’t always the best way to attract consumers, and as Lisa’s chart on page 2 showed, prices are not a priority like customer service and communication.

2. Formed by group consensus and lacks personal responsibility.

Competitor based pricing operates off the assumption that businesses already in the market have the correct answer and that every decision competitors’ make is intelligent. However, if a large portion of companies all use this tactic, then with time, competitor based pricing can lead to the entire industry losing touch with demand.

Summary: Competitor based pricing should be a part of everyone’s pricing process, but not the central pillar. As we alluded to before, competitor based pricing also gives you too much of a “set it and forget it” mentality. Pricing is a process that requires data and attention. If you’re not changing your prices and differentiating your product over time, you’re not sustainable. Yes, you should know what your competitors’ prices are, but knowing your customers and their demands is more important. If you take elements of all three of these pricing strategies, you should see increased business and an increase in your profits.

Understanding The Value

Without an understanding of what all is included in a bag of BioZyme mineral, it is possible your customers feel they are comparing apples to apples when, in fact, they are not. BioZyme mineral prodcts contain a host of things other mineral brands simply do not offer:

AMAFERM®
The key ingredient in all of BioZyme’s products, Amaferm® is a natural feed additive, that acts as a prebiotic increasing digestibility to 
maximize the energy value of feed.

OPTIMIN® Proteinates
The nutritional success of any organic trace mineral depends on the ability of the organic escort to hold onto and protect the metal from undesirable reactions. Optimin’s superior chelation stability maintains the integrity and keeps the organic mineral in its original form during digestion. Optimins are soluble and ready for absorption, especially when they are needed most – under stress or during difficult dietary 
digestive conditions.

PRICELESS Attributes of BioZyme Mineral Products

  • Research proven vitamin and mineral levels
  • Exceeds NRC requirements for respective production stage
  • Highest ingredient quality and consistency
  • No least-cost formulations as BioZyme manufactures to the ingredients, not the guarantee

An Inside Look at how the Value Pencils Out

Pricing is an issue of which 99-percent of all dealers struggle. However, Doug Underwood and his Area Sales Manager, Ben Neale, contest this issue with testimonials to demonstrate the benefits of including BioZyme® products in their customers’ nutritional programs in order to prove its value and thus price accordingly. 

Underwood has been selling BioZyme products for more than five years and became a dealer when he needed access to the supplement and mineral lines for his own cows. After using it for 19 years on his Polled Hereford seedstock, Underwood was a convinced of its worth. When his local dealer retired, he decided to establish his own BioZyme dealership at his farm near Campbellsville, Kentucky.

Many of Underwood’s customers were familiar with the products, but to continue to educate them as well as new prospective customers, Underwood and Neale have hosted field days to talk about how and why BioZyme products work. Underwood says when he hears the question of expense, he focuses his selling points around Amaferm®.

“That is what sets this brand apart from other mineral products,” Underwood says. “It’s one particular ingredient that makes a big difference in cattle. They have a much better feed intake and appearance. That’s the positive result you get from Amaferm.”

Neale’s territory covers Tennessee, Kentucky and Mississippi, so he’s on the road working with dealers like Underwood. In addition to field days and producer meetings, he says BioZyme has many marketing tools available to help dealers explain to producers how investing in premium products will increase their bottom lines. When Neale visits with dealers, he encourages them to think about inventory control. “Our price list shows buying 22 tons at a time is the best way to achieve greater margins, but if you have to sit on inventory for 6-10 months that may cost more money if operating on a line of credit,” Neale says. “So, we try to focus on flipping inventory faster. You can still turn a profit if you buy 5-10 tons at a time, and the product remains fresh for the customer.”

Underwood says the time he puts into selling a value-added product like those BioZyme provides is worth it. Even when cattle prices are down and it seems like input costs and supplements, like BioZyme, don’t make sense, he encourages fellow producers to try the product. Their return on investment will become apparent when they wean heavier calves or when cows settle on the first cycle. And he says, he would never lower his prices to match a competitor. “When they start comparing ingredients and prices from the local feed store, I have to show them what Amaferm does for them instead,” he says. “The math will speak for itself. If I can get a cow bred on the first cycle instead of the second I’ve saved 21 days at maybe $1.50 per pound and gain another two pounds per day for those 21 days for a total of 42 lbs. at weaning for an additional $63 per calf. The benefits BioZyme products provide for the additional cost pencils out in the long run.”

Neale says dealers should remember when faced with price comparisons from other mineral products they should focus on the ingredients BioZyme provides and how the ingredients found on the tag are not found in any other product. That’s what the extra pricing goes toward – better ingredients plus Amaferm in the mineral bag.

Neale says he talks to customers about Amaferm and how this prebiotic increases gut health, increases feed efficiency and helps animals recover faster from times of stress. The added benefit, he says, of two products in one bag is also a good selling point during price discussions.

Another benefit of the Neale-Underwood team is that ASM’s like Neale can help dealers grow their business outside of an established customer base. Neale is working with Underwood to recruit sub-dealers and build a network from customers who are two or more hours away. 

“I am working with Doug to build upon his strong local relationships,” he says. “It’s new for both of us but without the availability of stores in his area he has to network with breeders and others who can help grow his business.”

“Real business is successful when someone sees a return on investment not on price,” Neale says. “We want customers who use these products to understand and believe that as well. When you talk with someone who’s going on a diet, are they going out to buy and consume healthy food or junk? It’s the same with cattle. If you want higher returns then you have to be conscious of what you’re feeding them. You may have to pay more to be efficient.”

“Just let the product speak for itself,” Underwood says.

4 Myths to Debunk about Pricing

Pricing tends to be looked at as this ominous figure in business that’s so difficult that most are left paralyzed. As one of the least studied branches of marketing, pricing has become a black box for many dealers, who simply adopt existing prejudices and misinformation.

Put simply: if pricing is a black box, you’re losing money. A lot of it.

Therefore, let’s dispel some of the most common myths so you can be catapulted into action and start capturing all of that lost cash you’re leaving on the table. Increased revenue makes every business owner happy.

Myth #1:
We need to accept market or competitor pricing

Basic microeconomics teaches that in perfect competition, individual companies cannot affect market prices. In other words, businesses must accept the equilibrium price, where the demand curve crosses the supply curve. While this is a convenient way to calculate price, this theory doesn’t correctly reflect how the real market works. Prices in any market span across a range, rather than fixing on only one point. Product and service differentiation through brand, quality, etc. can all affect where your business lies on this range.

TRUTH: No matter the density of your industry, product and brand differentiation can take you well above the market standard.

Myth #2:
The only way to increase volume of sales is by decreasing price

It may sound too good to be true, but it is indeed possible to raise prices and increase volume at the same time. As Lisa states in her letter this month, price isn’t the only factor that attracts customers. Focusing on giving customers a reason to pay a higher price for your product or service is crucial, whether that be greater quality or better service. A powerful tool is market segmentation. Most products have a target audience, whether it’s the progressive cattleman, the bargain hunter, the show segment or the hobby horseman. Creating different classes for your product depending on quality or services can expand the number of customers you cater to, thus increasing buyers. Additionally, sometimes lowering your price can actually deter people from buying your product. Think about it. If I came up to you and said I’d sell you an Apple MacBook Air for $100, you wouldn’t buy it, because you’d definitely question the quality.

TRUTH: Volume is created by customer segmentation, charging different sets of customers different prices, and thus increasing volume and revenue.

Myth #3: 
We need to charge lower than everyone else

This is quite possibly the biggest misconception. A race to the bottom is one of the worst ways to compete, because you end up underpricing and losing out on your customer base. Your customers begin to question the quality of your product, but needs to buy the product. So they continue to shop around, and you lose customers. Lower prices equal lower revenue rates, which means the number of sales must increase to cover the loss. Obvious, yes, but it needed to be stated. Additionally, a lower price tag doesn’t mean customers will automatically flock toward your product. For example, if BMW suddenly sold its cars for $35,000 instead of whatever ridiculous dollar amount they’re priced at now, would that necessarily increase its revenues? Possibly in the short term, but in the long term they would begin to compete with cars made by Honda and Toyota who already have that market cornered. BMW would also lose out on the consumers that put luxury value in the premium pricing of their cars.

TRUTH: Underpricing is rarely the solution to any pricing woes. You end up dropping into a different segment of customers and lose out on cash from your current customers.

Myth #4:
Pricing isn’t important

Pricing is the most important aspect of your business. Period.
A 1 percent improvement in pricing results in an average increase of 11.1 percent in operating profit. No other business lever has that impact – not cost optimization, volume increases, or anything.


TRUTH:
Pricing is, bar none, the lever in your business that has the highest impact on the most important cell on your end-of-month spreadsheet – your revenue. You need to take it seriously.

Source: http://www.priceintelligently.com