Wednesday October 5, 2016
"How much is this?"
"Oh..." as the item is placed back on the shelf.
For those of you who provide a service, are potential clients excited about your services, yet they never seem to commit? The solution to both problems may lie in your pricing. No, I'm not suggesting you lower your prices, I'm actually going to tell you why you may need to raise your prices.
"How can I raise my prices," you might be thinking. Americans are primarily driven by something known as perceived value. If we weren't, every one of us would aspire to own a late model car and shop at the thrift store for clothing. It certainly would be a more economical way to live!
Similarly, potential customers make purchase decisions considering a product's perceived price. That is, how much a customer thinks that a product will cost them. These perceptions may or may not accurately reflect reality. Though rational buyers should consider a product's fully loaded lifetime cost, some may be swayed by simpler measures like shelf price, which may not be appropriately inclusive. I was shocked the first time I learned how outlet stores worked. Consumers go crazy when they find out they can get the latest designer clothing for 25% - 50% off retail - and they will put up with the small tear or missing button to do so.
Example of Higher Prices in Action
Lets think about the true value of a designer pair of jeans for a moment. To make a regular pair of jeans in China, the following chart was made up by Kristie Tippner, a retail strategist at Kurt Salmon Associates:
Fabric = $2.80
Trims = $1.17
Overhead/Financing = $0.37
Total = $4.84
As for designer jeans, I found a quote on the Internet claiming that it cost $50 to make a pair of designer jeans that retail at around $335. Let's assume that is true for a moment, that means that after getting 50% off, and getting the jeans at the "bargain" price of $167.50 - you are still overpaying by a whopping $117.50, after buying at an outlet mall!
What is interesting about this is how many consumers are paying these prices, and then walking out of the stores with the biggest smiles and telling all their friends what a great deal the outlet malls are.
It is all about perception. Big business understands consumer behavior, and as corporations continue to squeeze out the mom and pop shops of America, it is important that small business also understands consumer behavior in order to stay in business.
As a small business owner, it is common to structure your discounts so you can stay in profit. You know your margins and you are careful to stay within your boundaries. If your margins are so tight that they are affecting your ability to create real discounts, you may want to address your retail pricing.
A higher price will give the impression of a higher value, in marketing this is called the "Perceived Value". Who doesn't want to get something of great value at a high discount? For an example of how one company increased their monthly revenue from $7k/month to over $100k/month by discounting their product, read this article. If the offer is for a limited time, this increases the sense of urgency and the desire to not miss a great deal.
I would suggest taking another look at your pricing model. Many business owners will set their prices based on the going rates of competitors, my theory is to set your prices a bit above your competitors (increasing your perceived value) and stress the increased value that you offer over your competitors. You can then be sure to offer EVERYONE a discount of some sort as you constantly promote different offers. Everyone feels special when they get a discount. It will make your marketing offers more enticing, and coupled with an expiration date, increase the sense of urgency and the potential for an impulse buy.
Jewelry stores are notorious for always having sales. The law is very vague on what is considered normal pricing. The FTC rarely monitors normal prices versus sale prices. The laws in most states simply state something along the lines of "To be “on sale,” the item must have had a higher former price at some time within the year. If an item is always on sale then it’s false advertising."
Raising your prices can help you in 2 distinct ways:
- Your product/services will receive a higher perceived value.
- You can now take advantage of "deep discounts" and "limited time offers" to create a sense of urgency and help consumers to make the buying decision.
Raising your prices is very important, because it can help you to avoid another very common problem for small businesses - creating coupons and marketing materials with a real incentive to buy.
First of all, what is your offering? How many times have you gotten excited to see a 10% off sale? How about a 25%? 40%, 50%, 75%?
When designing your next customer incentive, think about what type of deals really get you excited. Obviously, the higher the percentage, the more excited you get.
You may also consider "loss-leaders". Sometimes it pays to take a bit of a loss on an item, if it brings more customers to you with the possibility of making other purchases or adding them to your lead list. This can be a free consultation, free information, or a risk-free trial.
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