How many of us are upset when a competitor “low-balls” a price to one of our customers or in our entire general market area? We all probably have interesting stories to tell about how this hurt our sales, stole one of our customers, how we fought this problem and won or lost the battle. But, consider this carefully: Do we really understand what the “Best” price is for ourselves or our customers? In order to know how to prepare for this inevitable situation, we must understand how to price our products intelligently.
Where do we start? Do we begin determining our cost of production and overhead and then add on a reasonable profit? Do we build the price from the production cost up, or do we start with some arbitrary or expected retail price and work backward to see if we can meet a wholesale price point to survive in the packaged ice market? Both approaches will result in a price, but is it the best price for our needs while meeting the needs of our customers?
How many of us actually start by studying our potential customers and learning what their business is and how our products supplement their offerings? Is our product an important part of their business? Is our product essential to their overall business offering? Is our product a non-descript item or a non-essential commodity or nicety that has little value to our customers? Does our product encourage the sale of our customers’ high value and high profit products? Without this knowledge about our customers, we cannot price our products appropriately. By “appropriately,” we mean at the level where it is most profitable for our company, is not a burden on our customers, and benefits their overall market basket offering. Their market basket offering includes packaged ice, and it can be as a standalone product, a necessary component of one or more of their products, or even just as something their customers expect them to have in stock as a companion product for their other products offered in the mix.
To be succinct, is the price they pay for your ice beneficial to their overall businesses? For example, a bag of ice cubes to a high-end cocktail lounge is an essential component for mixed drinks but accounts for a very small cost of the product sold. A single bag of ice cubes seldom would be sold as a product offering in this same high-end cocktail lounge. While across the street at the convenience store, a bag of ice is a standalone product and not provided as a component in another product. To the cocktail lounge, the ice cubes account for possibly €0.03 – €0.04, while the cocktail itself (the actual product sold) sells for maybe €10.00. Thus, the ice– although essential–accounts for a small fraction (about 1%) of the product sold cost. To the convenience store, the cost of the ice cubes is also essential to the end product, but accounts for the entire cost of the product before overhead and profit. To one customer, the price he pays for your ice is either of very little concern or of great concern when the product sold cost is considered. Without this understanding of your customer’s business, you are pricing your product blindly and probably giving away some of your potential profit.
Once you have analyzed your customer’s need for your product, you can start to understand what else is important for your product offering to this customer besides the actual monetary price. How important is reliable service, or specialized delivery accommodations, or monthly billing arrangements, or… and the list goes on. One often overlooked benefit to a potential customer is the amount of time and expense and overall headache that can be avoided by buying packaged ice rather than making it onsite. You might recall the EPIA developed a bi-fold handout for EPIA members to your customers understand the entire cost of making ice, vice buying packaged ice. This brochure can be downloaded from the EPIA website for your use.
Once you have convinced your customer to buy ice from you rather than making it onsite, you must continue to prove that your price fits within his business model. That is the importance of understanding your customer’s business so that your product, “Ice You Can Trust,” fits nicely into his business and complements and improves his overall offering to his customers.
Understanding your customer’s business is an essential the part of customer service. You must do the research to fully understand all of your customers’ needs, how they value their time, and how your products fit into their daily routines. You are not selling ice cubes, but you are selling a bundled product package that can be customized for each of your customers. That bundled product package consists of not only the frozen water, but the conveniently sized bag to temporarily hold the ice, the specialized delivery to your customer’s location exactly where and when needed, the benefits of not having to invest in ice makers and all the costs and responsibilities related to that, the education you provide on how some of your customers market your ice, as well as a reasonable monetary price for the cubes. When you make the effort to better understand your customer’s business and sometimes emotional needs, you can influence his perception of what your overall bundled product includes besides the monetary price. With that understanding and customer agreement, you can make your customers’ routines more manageable and profitable. Your monetary price to them becomes less important when deciding what source to use to obtain “Ice You Can Trust,” and you can charge more for your overall customized bundled product package because your customers feel that it is worth the cost because it fulfills his business and emotional needs.
There is still another benefit that helps retain your customers. If you explain your customized bundled product package to your customers so that they understand the true value to them, you have already begun to build a fence around each of your customers that will keep out the “low-ball” priced competitor who does not or cannot provide the same overall product package that you provide to your valued customers.
Pricing is a difficult part of doing business and is very important to understand and set properly in order to get the most profit from your sales. Pricing can mean the difference between success and failure. Let’s consider some of the many myths we have been taught about pricing.
Myth #1: “I must meet our competitor’s price.”
How do you suppose that came about? My guess is that some salesman trying to get a new customer was told by a potential customer that he must meet or beat your competitor’s price to get the potential customer’s business. This untrained and unprepared salesman then goes to management and passes the information along as if it were fact. This salesman did not prepare for the sales call. He does not understand the potential customer’s business model or even the business owner’s needs. This is the type of salesman you want your competitors to hire away from you. They do nothing to help your business prosper, and actually encourage you to fail.
A well-prepared salesman will explain the benefits of your customized bundled product package where the monetary price is only a portion of the product you are selling. The customized bundled product package is what your salesman must be selling, not the ice component alone.
Myth #2: “Pricing is not important as long as I make a profit.”
That is saying that you have more important things to think about than how to run your business. Pricing is very important and can make immediate difference to your bottom line if it is well thought out and considered. In any business-to-business transaction, pricing can and will be highly influenced by a number of different factors, and the range of prices can be wide. Again, think about the high-end cocktail lounge and the convenience store across the street. One business can pay twice the amount or more than the other with almost no effect on product margin. Why should your price be the same to each business? Don’t set your price with your eyes closed or you will might find your business closes also.
Myth #3: “Experienced salespeople get the best price for my products.”
While experience is important and a valuable education when it comes to sales and sales tactics, it comes with flaws. Experienced salespeople often exhibit learned behaviors that are not always conducive to profitable pricing. Often a salesman will rest on his “experience” and take a short cut such as guessing a business’s needs instead of spending the necessary time to do the needed research. An experienced salesman has heard so many objections that he might assume he will be faced with these objectionable responses when meeting with a potential customer. These objectionable responses might not arise or will be elegantly countered when your salesman has properly sold your customized bundled product package rather than the commodity component that your competitor is offering.
Many experienced salesmen want to make the sale and get to the next opportunity and by doing this might easily over estimate price sensitivities and give away your margin unnecessarily. Any of these actions will prevent the salesman from obtaining the best price for your product and what should be the best bundled package for your customer.
Then there is always the salesman’s pay package. Commission seems to get lower priced bulk orders due to quickly making the sale and then moving on to engage the next customer. Sales quotas have the same drawback and encourage easy sales and less profitable pricing for you while the salesman meets his sales quantity target. Many experienced salesmen will game his compensation package. After all, he has the experience to understand what is best for his bottom line. Salaried sales personnel have similar advantages and disadvantages that must be explored.
The experience of your salesforce is valuable, but must be managed just as every other part of your business must be managed. Think of your business as an orchestra and yourself as the conductor; you must get the best performance out of every member of the orchestra. If not, you have discordance, not enjoyable music.
Myth 4: “If I raise my price, my existing customers will leave.”
You have built a relationship with your customers. Remember that fence you have built around each of your customers to keep out the “low-ball” priced competitor. You have placed your bundled product package in their hands and they are pleased with the results. Now you are adjusting your pricing model for your bundled product package to help your overall revenue and margin and want to maintain and grow your customer base while also gaining new customers. Pricing models must be well thought out before going to market. You do not want to confuse your customer or to make him feel that he must pay more just because you want a new car this year.
Maybe your new pricing model includes promotional discounts for major events or festivals. You can raise your everyday price somewhat to finance promotional discounts with some left over to enhance your overall margin. Your customer can pass the small cost increase along at his normal markup and sell twice as much ice during these special events. You can schedule special delivery options and you can help him promote your product with the promotional discount if he buys twice his normal usage during this event. He can use the promotional discount to provide a lower retail price or pocket the discount as better margin. After all, the price of ice is very elastic when the demand is high, and the fact that your customer has a lot of “Ice You Can Trust” means he can sell a lot of it during the event even at a premium rather than a discount. Let him decide how to market his product for the best margin for him. You will have done the math to project his increased margin as well as yours. You both end up with better overall profit.
Myth 5: “I will provide a special discount for my customer so he feels special.”
Not only will he not feel special that he was able to haggle a lower price, he will wonder what his competitor is paying for your product. The next time price is discussed he will demand a still higher discount, and if he gets it that price, the spiral will continue until your margin is gone or your customer is gone because he cannot trust your pricing or product legitimacy.
Special discounts to customers must be well thought out and discussed with your customer so that you both understand why the discount is being offered and what it is to be used for. Too often, special discounts merely undermine the confidence your customer has in your business model. Just as you must understand his business, he must understand yours to trust how you price your product package to him.
These myths haunt every businessman and business woman, not because they are scary in and of themselves, but because we are not sure whether they are true or not. Like any “urban myth,” did they get started because they were true, or because they sound like they could or might be true? In any business there is the fear of the unknown. The only way to counter the unknown is to confront it and dissect it until the truth is no longer unknown. These and other pricing myths must be approached in the same methodical manner. Each must be studied logically until a decision can then be made to act in the most revenue enhancing manner for your individual business.
Stan Williams – EPIA Director