Business Coaching

When Profit-Making Becomes Profiteering

A petrol station in Exeter in the South West of England has been accused of profiteering when it increased petrol and diesel prices from around the £1.30 per little to £1.99 per litre. The controversy has started me thinking about the question "When does profit-making become profiteering?"

The Situation

Shell tanker drivers are coming to the end of a four day strike which has stopped new supplies of petrol reaching garages although a second strike is scheduled to start at the weekend. This strike has caused some fuel service stations to run out of petrol and the situation is particularly bad in the South West of England in Devon and Cornwall which attracts many holiday-makers at this time of year.

Other local petrol stations ran dry so BWOC, the garage accused of profiteering was faced with a choice:

1. Continue to sell at the existing price and quickly sell out its remaining stock
    
2. Increase the price following the natural laws of supply and demand
    
3. Introduce some form of rationing

Controlling Demand

In an article about the Beer Game I explained how sudden  fluctuations in demand can cause massive consequences further along the supply.

The first thing that people hear when a product is short is "I had better buy some more. I don't want to run out."

People react selfishly to protect their own self interests.

In the petrol shortage, drivers want their fuel tanks to be full while during normal times, they may only buy half a tank's worth and effectively drive around about a quarter full.

But this selfish streak is no surprise. At the very heart of marketing is the basic question "What's in it for me? If I gain more than I lose, we may have a deal. If there is nothing in it for me, why should I bother?"

This idea of exchange - what you give me has more value than what I give you - is fundamental and nobody will pay more than the value they attribute to a product or service.

The Basic Laws Of Demand & Supply

Without going into a full economics lesson on supply and demand here are a few of the basic laws:

1. As price reduces, demand increases.
    
   People who wanted before but couldn't afford to buy, can do at a lower price and people who wanted to buy two rather than one will be more willing to do so. In terms of the value to price relationship, if the price is £10, then only those people who value it at £10 or more will be interested. If the price reduces to £8 then a new group of customers see the benefits of buying.
    
2. As price increases, supply increases.
    
   More people have an interest in supplying a product if prices are high and profits are good. This will attract opportunists into the market but also allow higher cost producers and suppliers to make money when they couldn't at lower prices. Take oil for example. It costs money to extract from the earth and each oil field will have different costs. Oil field one may cost $8 per barrel and is therefore always turned on. Oil field two costs $20 per barrel and is only operated when oil prices are above $20 per barrel on a sustainable basis.
    
   
3. The market sets a natural price where demand equals supply.
    
   
4. If the market is shocked out of equilibrium and supply rises above demand, prices are forced down.
    
   
5. If demand rises above supply, prices increase.
    
   This makes the product less desirable to some potential customers who decide they no longer want to buy and a new equilibrium price is set.

Returning to the petrol example, rising the price is a natural way to control demand.

Those who don't value the product at $1.99 per litre will not buy and those who have the time (and fuel) have the opportunity to drive outside of the local region and find new sources of supply.

But people are saying that this price rise isn't fair.

What Is Profiteering

My definition is:

Profiteering is taking unethical advantage of a supply shortage to make excessive profits.

It is a serious accusation and is particularly nasty in wartime where goods were diverted and sold on the black market.

But isn't the basic application of supply and demand applicable in just about any market.

My hero, Jay Abraham, has become famous for his $5,000, $20,000 and even $40,000 conferences. People went because they believed that they would receive more value from his advice than the price they paid.

But there is only one Jay Abraham so is Jay profiteering from making excess profits from the supply shortage?

The demand/supply basis is seen most clearly in auctions including eBay.

Item one is rare but few people want it so it is sold for a low price while item two is also rare but in high demand and sells for a much higher price.

Is the seller of item 2 profiteering?

Sugaring the Pill

To help compensate the drivers, the garage has been issuing discount vouchers worth £25 off an MOT (a compulsory safety test that all cars three years old or more have to pass each year to be considered roadworthy in the UK.)

This is a very interesting tactic, giving locals something of value and potentially cross-selling MOTs and vehicle services to people who haven't dealt with the garage before.

Would Rationing Have Worked Better?

Increasing the price gave drivers the free choice - buy the petrol at the high price or don't buy. Yes the garage gained but so did the customers who bought because they value the petrol higher than the price. The price rise meant that the petrol was saved for the people who had most value and reduced the desire for people to fill up their tanks "just in case."

The alternative would have been to ration supply.

Suppose the garage had imposed a £10 limit on supplies to make sure that everybody had a bit while stocks lasted.

People would still be eager to top up their tanks so many low mileage drivers would have petrol tanks full of fuel that wouldn't be used in the shortage.

People who need the extra fuel have a problem.

As it now takes over £50 to fill a car with petrol for even small family saloons, would these people be allowed to have five £10 transactions while waiting at the pump, going off and paying each time and causing greater transaction because of the increased time.

If not, would they be allowed to rejoin the back of the queue, again increasing congestion and providing further demonstration of the petrol shortages and increasing general panic buying?

Or will they be told that they can't buy any more fuel for two days regardless of their needs?

Conclusion

There are no easy answers when demand exceeds supply but the free market and the established laws of supply and demand provide a system that works.

It moves resources to those who are prepared to pay the most.

In some situations it's not ideal and that's why governments need to step in to make sure that human rights to food, water and health care are provided.

But for a petrol station in Exeter, increasing the price to control demand seems a reasonable action to me.

And besides, since when has making a profit been a bad thing?

To Your Success

Your Profit Coach

Paul Simister

Business coaching for customer focused entrepreneurs

Valuing Differentiation With Premium Prices

All the gurus say that for your business to be success you have to follow a differentiation strategy so that you stand out from your competitors. Provided you are different in factors which matter to customers you then have a competitive advantage based on being better, cheaper or different.

For the differentiation advantage to turn into extra profits you have to be able to justify why customers should be prepared to pay premium prices.

Inspired By Footballers Pay

I started to think about why people are prepared to pay premium prices after I read the sports news this morning about two Manchester United footballers who have agreed new deals. One player is 28, the other 29. Both are England internationals and have many years of first team experience. Both are tall and strong and can play in the same position. But it is reported that one player has agreed a deal for £60,000 per week while the other will receive £120,000.

So why is it that Manchester United are prepared to pay one player 100% more than the other?

Small Differences Can Make A Big Impact

Everyone who watches Manchester United accepts that the one player is better than the other. He is a little more aware of what is happening in the game. His positioning is a little bit better. He is a better passer of the ball.

And all the small differences add up to one big difference when the Manchester United management decide how much each player is worth to the team.

Easy Pricing Mistakes

It is very easy to misunderstand the value that your product or service creates.

When you look at the advantages from a supply perspective, the differences are very small and knowing how small, you may not have the confidence to add much of a premium price.

But turn the situation around and look at it from the customer's perspective.

These differences in the two players may mean that once in every five games, a goal may be scored by the opposing team which could have been avoided if the better, more expensive player was in the team.

And over a thirty eight game season, that could be an extra seven or eight goals conceded so eight games may be drawn instead of won, gaining the team eight points instead of twenty four.

Championships are won or lost on much smaller margins than that.

Look At Customer Consequences

To understand the value of your differentation, you need to look at your product or service through the eyes of a customer and in particular look at the different effect of the consequences of purchase and how these consequences relate to their goals.

Remember people buy something for what it does, not what it is.

I think that it was in the excellent book "The Strategy and Tactics of Pricing" that I read about the example of two paint brushes.

The first was a standard paint brush which cost $10 to buy.

The second paint brush was special. The company had invested a fortune and developed innovative bristle technology that meant the paint could be applied twice as quickly and achieve the same quality.

So is this new paint brush twice as good as the standard?

Yes.

So should it be priced at $20?

No.

When you are buying a paint brush, you are buying the ability to put paint on walls, doors and any other object.

Your goal is to make whatever you are painting look nice as quickly as possible.

It is time which matters and this is where the extra value of the paint brush comes in.

If the faster speed of the new paint brush will save you ten hours work, its value is worth much more than $10 to you.

Identifying Your Extra Value

So you are not a professional footballer and you don't sell paint brushes but you can still apply these ideas.

Look at your products and services and compare the consequences of buying from you rather than from your competitors.

Identify where the differences are and calculate what this means to a customer [segment if possible and you can set up price boundaries].

You now have the maximum price premium you can charge but your task is to persuade the customer to pay more so you have to give an incentive to buy so you both share the gain.

You need to educate your customers to appreciate the extra value you are providing and provide proof through testimonials or demonstrations.

Valuing Differentiation With Premium Prices

If you have gone to the trouble of creating sustainable differentiation in your products and services, it is essential that:

• you capture this extra value through premium pricing so that your profits are higher than industry norms or
   
• You knowingly intend to offer better value for money with the intention of gaining share. Your competitors may react but going back to the paint brush example, their room to manoeuvre is very limited. The price of the standard paint brush pay fall from $10 to $5 but that has little effect on the value of the time saving which is worth much more.

This is why knowing, understanding and applying the principles of customer value are so important and why customer focused entrepreneurs do so well.

If you would like a free report please click on "How To Price What You Sell"

To Your Success

Paul Simister

Your Profit Coach, business coaching for customer focused entrepreneurs

© Planning & Control Solutions Ltd 2007-2008 All Rights Reserved

Pricing: How To Price What You Sell - Free Report

The high quality free resources provided by business gurus like Rich Schefren and StomperNet have inspired me to "move the free-line" starting with a guide to the essential area of pricing: How To Price What You Sell.

Previously I have had this on a very restricted circulation because I thought that this 21 page guide to pricing was too good to give away for free.

Pricing is the number 1 most effective lever on business profitability

A bold claim but if you work out the numbers or get your accountants to work out the numbers then (provided you are profitable) a 1% increase in prices with no other changes will have more effect than a 1% reduction in costs of a 1% increase in your sales volumes.

Ir works the other way around as well. If any of your main profit drivers worsen, then your average selling price is the one that has the maximum impact.

Your pricing strategies are that important but generally pricing is given very little attention and certainly not the dedicated focus that it needs.

In large companies, pricing often falls into the white space between departments. Is it a sales responsibility, a marketing responsibility, a product development responsibility or a finance responsibility?

In smaller companies, the pricing decisions are often just made on the hoof with no market research and little testing.

How Do You Get This Great Report?

All you have to do is to fill in your name and email address in the form below, press the subscribe button and then you will receive an email to ask you to confirm that you have subscribed. I hate spam and I want to make sure that it is you who has added your name to my email list.

Name:

Email:

Download the report and work out how you can improve your pricing strategy to increase your profit.

I find strategic pricing a fascinating subject as it pulls together so many other management disciplines and for me, pricing is where your business strategy hits the road.

Customers Don't Buy On Price

Many people assume that price dominates the customer buying decision but often that just isn't true.

As an example, indulge me and look at the clothes and shoes you are wearing? How of these items did you buy because you were sure that they were the cheapest available? Are you wearing the cheapest suit, shirt, trousers or shoes you can buy?

Then look at your car, the food you buy and your computer. How many of these did you buy because they were the cheapest? Yes you may have hunted around for the lowest priced new BMW 520 you could find but a second hand model has a lower price and there are many cars which cost less to buy.

You see, when people buy they have other reasons for making that buying decision:

1. Convenience and a pressing time factor
    
2. Value for money. This product gives me more benefits than that one and while the price is higher, the value for money is better.
    
3. Visual and emotional preferences. You just like this one but don't like that one.
    
4. Status. Sometimes you buy the more expensive because it makes you feel good and makes other people look up to you. "He's got a new Jaguar coupe. His business must be doing well."
    
5. Confidence. I have more trust in this supplier or "That sounds too good to be true"

What Happens If You Cut Price?

I believe in giving customers a good reason to buy and that can mean making compelling price based offers to get them to give you a try but what happens if you sell a commodity product.

People know what they are getting so imagine you are a market trader selling vegetables with similar stalls around you.

What happens if you walk around and see that everyone else is selling cauliflowers for 80p so you decide to give a special offer for 45p?

Soon everyone is selling for 45p or may be even less.

There Has To Be A Better Way

Sign up for the report and learn:

• How other companies set their prices
   
• How to calculate whether a change in prices will pay off
   
• The differences in the three main ways to price - competitive pricing, cost-plus pricing and value based pricing
   
• The 5 main pricing strategies
   
• How to motivate customer behaviour through different types of discount
   
• The 9 steps to a pricing strategy
   
• How to discover what your customers want
   
• How pricing fits into the 4 Ps of marketing
   
• The role of pricing in your business strategy
   
• 6 factors which affect your competitive advantage and the price you charge.
   
• Two very useful ready reckoners to find out the volume changes required to break even for a particular price change for your business margin.
  
  For example if you have a 40% margin and you are considering changing prices. If you increase your prices by 7% you can afford to lose 15% of your sales volume but if you reduce prices by 10% you need to win 40% extra volume.

You can now see why I have been holding back the report. It is packed with great information to encourage you to think about your pricing strategies and help you to find ways to increase your profit.

Just enter your name and email address (please check it is correct) in the boxes below, subscribe and then confirm that it was really you who asked for the report.

Name:

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If you don't get the email within a couple of minutes, it probably means that the email address entered was wrong so try again. Sorry but you know how computers are very strict on accuracy.

To Your Success

Your Profit Coach

Paul Simister

Business coaching for customer focused entrepreneurs

Selling At Your Customer's Convenience

Yesterday I was in the supermarket buying my pizza and twelve bottles of wine ("a typical man's shop" looking after my immediate needs and the tax on wine goes up today!)

I looked at the shopping of the customer in front of me at the checkout - grated cheese, grated carrot, washed lettuce... - and I was struck by how much weighting this lady gave to convenience.

I may not be a master-chef but grating cheese isn't beyond my culinary skills and these products are more expensive.

It is clear that people are prepared to swap money for time savings on even the simplest of activities and pay more for convenience.

My Questions To You

Where can you add a "done for you" element to your product or service?

What is your equivalent to grated cheese where you take away all the effort required by your customers?

If you can identify a new product/service offering with built in added convenience then two things can happen?

1. Existing time pressed customers will grade up to your premium solution. They want what you offer to be quick, easy and as little effort as possible and if you don't offer this deluxe service, they may be tempted to stray.
    
2. You may attract new customers who either buy from a competitor at the moment offering a service on a broad parity level to yours or you will attract new customers who like the idea of what you offer, know it makes sense but really can't be bothered.

It Works The Other Way Too

If you are already a premium service provider, then are there ways that you can take the costs out by transferring activities to your customers?

The flat-pack furniture market is built on this concept and it brought big stock-holding and transport savings with it as well.

Can You Bend The Time-Space Continuum?

Instead of delivering a service at a time and place convenient to you, can you find a way to make sure that your customer gets a great experience at their convenience?

I see this in the Internet marketing arena where high priced conferences are filmed and become lower priced DVD based home study programs for people who want the knowledge but don't have the time to attend.

Two current examples of this are:

1. The Rich Schefren / Jay Abraham Maven Marketing Home Study
    
2. The John Carlton Copywriting Sweatshop 2 Home Study (I recommend you take a look at the free videos if you have an interest in copywriting)

I also see it coming through in business coaching programs where the material is delivered in multi-media formats and teleseminars where you can either join in the group question and answer sessions or more passively listen to it at a time convenient to you.

Two examples are:

1. Michael Port's Book Yourself Solid coaching program for professional service providers
    
2. Rich Schefren's Business Growth System Internet business coaching program

Is this something you can do?

Can you find a way to make it much more convenient for your customer to use and gain the benefits from your product or service and therefore make it much more tempting to buy?

The Key Message - Make It Easy To Buy

Make sure that you don't restrict your sales by just focusing on one part of the "do it for yourself / done for you" continuum.

Offering a range of alternative solutions is the way you can cater for prospective customers who put different values on their time and have different skill levels and interests.

At the same time can you take the inconvenience of time or place restrictions away?

The customer focused entrepreneur (custompreneur) sells at the customer's convenience and reaps the rewards. If you remove the obstacles and make it easy for customers to buy and use your services, they are likely to buy much more.

To Your Success

Your Profit Coach

Paul Simister

Business coaching for customer focused entrepreneurs

Dangers Of Competing On Price

At the weekend I walked through a shopping centre in Birmingham where I rarely go.

While there, the danger of competing on price and positioning your business as the lowest priced offering was price was reinforced to me.

Someone can always come along and undercut your prices.

There is quite a large retail chain in the UK called Poundland which sells everything in the store for £1.

Its positioning is clear. It is "cheap and cheerful", "pile it high, sell it quick."

Not my kind of shop at all which is why I don't usually pay much attention.

But a few stores down I found a Poundland imitation - selling everything in the shop for 99p or less.

Then to my amazement, I almost immediately found another Poundland imitator but this time selling everything for 98p or less.

It's only a penny here and a penny there but it does show what happens when you just compete on price.

Almost inevitably someone else can come along, shave their margins a little bit more and undercut you.

A low price strategy only works if you are the lowest cost supplier but to make it stick, you probably need a 10 to 15% cost advantage. Much less and your competitors are still going to be nipping at your feet, all justified through the logic of marginal pricing.

It was Michael Porter back in 1980 who identified three generic strategies:

1. The lowest cost strategy - your aim is to be the lowest cost producer/supplier.
      
2. A differentiation strategy  - your aim is to be clearly differentiated from the mainstream in a way that adds value to customers who are then willing to pay more for your particular product.
    
3. A focused strategy  - you target a particular niche (which is really a sub-strategy of the first two) by being a specialist, either offering a uniquely differentiated product or a low cost product where all the unnecessary and unwanted bells & whistles have been removed.

I have a lot of time for Michael Porter and find this model a very useful framework although it has become quite common to criticise it because Michael Porter warned of the dangers of trying to be differentiated and the lowest cost producer.

The almost inevitable result is that you get "stuck in the middle", neither one thing or the other and finish up making inconsistent compromises.

As Michael Porter himself pointed out it is possible to be able to pursue both a lowest cost strategy and a differentiation strategy but very special conditions have to apply.

You either have to have some unique proprietary resource advantage that gives you lower costs, an innovation that you can effectively protect through patents and trade marks or you have a bunch of competitors who are stuck in the middle and making a bad set of decisions.

Value For Money

In my experience it is a mistake to think that people buy on price.

They like to think that they do and you may be one of them.

But how many things can you say that you have bought because they were the absolute cheapest you could find.

Just take a look at the clothes you are wearing now.

Were they the cheapest or did you make some kind of value for money assessment?

Customer value is a fascinating subject and one that I intend to blog about frequently.

Just like beauty, value is in the eye of the beholder.

If you can find out what it is that your customers value most and provide it to them economically (that's your cost, not your selling price), you will be protected from these cut-price merchants who shave a penny off here and there.

To Your Success

Your Profit Coach

Paul Simister

Business coaching for customer focused entrepreneurs

Business Lessons From Led Zeppelin

Last night Led Zeppelin played the O2 Arena in London for their first concert together for 19 years.

The accounts I've heard and read say that it was a remarkable experience for those who attended but what business lessons can we learn from it.

Value Pricing - Value Is In The Eye Of The Beholder

I can't think of a better recent example that the price that people are willing to pay has everything to do with the "value" that the product or service provides rather than the cost.

It's incredible but one 25 year old paid £83,000 for a pair of tickets for the concert last night, more than he paid for their house. It was in a charity auction for the BBC Children In Need appeal but it was the appeal of the chance to see Led Zeppelin that drove up the bids.

I thought the £125 for a standard ticket was on the high side when it was announced as the price to see Led Zeppelin along with 18,000 other people but 20 million people tried to get tickets.

Interviews last night showed that people have travelled from all over the world to be there at this unique concert, adding hundreds and possibly thousands of pounds to the price they effectively paid for the experience.

So are you locked into focusing on the cost of a truly unique product or service or do you want to learn from Led Zeppelin and base your prices on the value that your customers get?

Up-sells and cross-sells

I don't know whether there were various up-sell packages where people could pay much more to have a chance to become "more involved" in the event by gaining backstage access or the after show party.

Certainly the celebrities flooded to the concert but this only adds to the attraction of being able to get on the inside track and would push up the value of any up-sell to celebrity hungry people.

But you can bet that there were cross-sells at the concert.

Even if you have only paid the £125 basic ticket price, by the time you've bought your programme, T shirt, sweat shirt, mugs... it's easy to see the opportunity for another £50 to £100 per person being made.

Can you sell more to your customers when they are in a buying frenzy? While a few may spend more than they should have done, I bet even more wish that there had been more souvenirs of the remarkable event.

I know that this can be seen as a cynical ploy which is why I recommend that you adopt Jay Abraham's strategy of preeminence (my views or from Jay)and act for the good of your customers. 

The value of PR

Did you see the adverts for the concert?

No I didn't either.

The whole promotion was based on massive PR and whatever came before is likely to be swamped by what will appear in the next few days from reviews of the concert, snippets of videos taken on mobile phones and most of all speculation that there could be a full world tour.

The whole thing has been a great example of the Attention Age solutions recommended by Rich Schefren. Just watch how Web 2.0 goes Led Zep crazy.

Are you using PR in the best way or can you learn from Led Zeppelin?

The value of the back-end

With this wave of publicity, what do you think is going to happen to sales from their back catalogue?

I'm listening to Physical Graffiti as I write this and Led Zeppelin seems to have dominated my CD player in recent weeks. Even when I'm walking my dog I've had the riff of Whole Lotta Love running through my brain.

Do you have other products that your customers can buy after they have bought your main product?

The value of reputation

The band split up in 1980 when drummer John Bonham died but the whole Led Zeppelin phenomenon is powered by the reputation they built in the late sixties and early seventies.

It didn't seem to matter that lead singer Rob Plant is no longer young and sexy but 59 years old and showing all the signs of "living".

Have you looked at the reputation that you are building. Every time you touch a customer, a prospective customer or a potential referrer it affects your reputation. Sometimes good, sometimes bad.

The fact that Led Zeppelin have resisted the temptation to limp through the eighties and nineties making poor imitations of their great albums has added to their reputation.

Make money where you can

Will there be a concert tour?

I saw an estimate in The Sunday Times that Led Zeppelin could make £150 million. Wow.

Are you intentional in the way that you identify and take advantage of money making opportunities?

If you want some Led Zeppelin

Have I whetted your appetite for the real thing?

I have added this DVD to my letter to Santa (Amazon UK or USA)

Two of my favourite albums are:

Physical Graffiti (Amazon UK or USA)

And the live album How The West Was Won (Amazon UK or USA)

Or their new Best Of - Mothership (Amazon UK or USA)

I've been wondering how I can link my passion for helping small businesses with my love of classic rock so look out for a new blog I'm tempted to write - The Greatest Live Albums and DVDs from the Classic Rock Stars.

To Your Success

Your Profit Coach

Paul Simister

Business coaching for customer focused entrepreneurs

Why Accountants Are Charging More Fixed Prices

Have you noticed how professional accountants (CPAs, chartered accountants, certified accountants) have gradually moved from charging on a time basis to charging a fixed price for an agreed service?

As fixed pricing involves risk and accountants are not usually associated with taking risks have you ever wondered why?

Perhaps you believe that it's market driven.

It's what clients want isn't it?

A known price that clients can budget for rather than a nasty shock at the end of the year when all the time based costs are added up.

But what if I told you that the change of accountants moving from time based charges to fixed pricing has been driven by a desire for the accountant to make more money.

In the ground-breaking book, "Professional's Guide to Value Pricing", Ron Baker of VeraSage Institute explains why accountants and other professionals should throw away their time sheets and agree a price with the client for what the service is worth.

I call this a move from input pricing (what you have to put in) to output pricing (what you get out that is valuable).

This is an important distinction that cost-plus pricing totally ignores.

There is no automatic link between cost and value.

Let me give you a simple example.

I find the UK payroll systems very complicated (even though I am a qualified accountant) and I am too mean to buy computer software and pay for updates to a payroll for one person.

So I do it manually but it takes me a long time so I don't pay myself very often.

If I offered a payroll service to my small business clients, my inputs would be very high and I'd want to charge a big fee to do it. But the value is very low and no one would pay what I would want to charge.

This is a far-fetched example but I am trying to make the point that customers shouldn't be asked to pay for any production inefficiencies or poor purchasing.

But also they should not automatically gain from your improved productivity. Just because you have invested in new technology or improved your processes or sub-contracted the work to a lower-wage economy, it doesn't mean that the price you charge to your customer should be cut.

Can you learn a lesson from your accountants

I encourage people to adopt the Jay Abraham technique of funnel vision - to look at other industries and try to learn from changes that are happening and seeing whether they can be applied to their own.

So how well do your prices reflect the value of your service?

If it costs you £50 to make, you charge £100 but your customer gets £1,000 of value then you could be leaving a lot of money on the table.

But you base your prices on competitor prices?

Then value pricing still works.

If your competitor sells a similar looking service for £75 then initially it looks like a problem. Perhaps you will have to swallow hard and match or beat the £75 price.

But before you do, take a look at the value your competitor offers.

What if his £75 service only generates £500 value for the customer?

Then you've got something to sell. By spending another £25 the customer could get an extra £500 of value.

And that looks a great deal.

In fact it looks too good!

Instead of reducing your prices you should be increasing them and (provided your competitors can't match your extra value) not by a meagre 5 or 10%.

You would be giving your customer an extra £500, so what should the customer give you back in your price premium?

£100? £250? £450?

The right answer depends on your ability to convince your customer of the extra potential value, the likelihood that the extra value will be generated by the customer and that the value is unique to you and not generally available. And that's where your selling skills have to be used.

Where the returns are certain and there are no risks would you give me 90p for a £1 coin?

Of course you would.

To Your Success

Your Profit Coach

Paul Simister

Business coaching for customer focused entrepreneurs

Retail Price Matching Guarantees - Perceived v Real Benefits

In the UK a department store called John Lewis has used a famous slogan "Never knowingly undersold" for 82 years to reassure customers that the best deals can be found at John Lewis.

If customers found the exact product cheaper elsewhere, then John Lewis would refund the difference.

John Lewis did regular price checking and, where lower prices were discovered, they lowered their prices to match or beat the competition.

But times change and yesterday John Lewis admitted that its promise to beat any competitor on price will only apply to shops within 8 miles of the particular store.

This was a move forced on John Lewis through the changing trends in retail.

John Lewis are a traditional retailer with stores on the High Streets of the major cities and towns in Britain. But retailing has changed in the 82 years since the price matching promise was made.

Out-of-town warehouse style outlets and Internet based competitors have much lower costs and have the ability to sustain prices below John Lewis.

As from 20 October 2007, the price promise changes to bricks and mortar outlets within an 8 mile radius of the store and this is being tested in Aberdeen, Glasgow and Edinburgh.

The Customer Benefits of Price Promise Guarantees

The customer benefits of this type of price promise guarantee is that it makes it more easier for the customer to buy from a source that it trusts.

No longer does the customer have to visit all kinds of different outlets to check prices on major household purchases.

It adds certainty to the process, reduces buyers remorse and the bad-will from finding an item you've just bought at a significantly lower price elsewhere.

But it may not give you the main benefit that you expect - lower prices.

The Supplier Benefit of Price Promise Guarantees

The implied suggestion behind a price guarantee is that prices are guaranteed to be low but it doesn't necessarily work like that.

In retail situations where products are standard and service levels are likely to be similar, price is the main differentiator.

Whoever sells at the lowest price wins the order and pockets the incremental margin made on the sale.

Let's look at what may happen in a simple example with a television.

Store A sells a television for £250 that it can buy for £150 and makes £100 margin.

Store B enters the market and doesn't have the purchasing power of store A and pays £170 but decides to sell the TV for £240 as it is happy with the £70 margin on the business it believes it can capture from undercutting Store A.

Prices could be reduced in tit-for-tat moves all the way down to Store B's purchase price, beyond which it cannot go.

But if Store A has a price promise guarantee, "we will match or beat any rival offering" then look what happens when Store B enters the market.

It looks at Store A's price and looks at the price guarantee. It immediately knows that there is no incentive to undercut Store A. Instead it will price match at the £250 level. Nothing else makes sense as Store A has the market power to beat Store B at the discounting game.

So in this situation we have a price guarantee that appeals to consumers and creates customer goodwill as it suggests fair deal pricing but it actually leads to higher market prices.

This is the power of price signalling - provided the threat is credible and people can see the rival prices, this type of price guarantee removes any temptation to price cutting. The pay-offs just don't work - a lower per unit margin and no increase in sales volume to compensate.

The effective use of price guarantees are a great example of the way that game theory can be built into business strategy. Game theory is the most effective way of looking for likely responses from your competitors.

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Your Profit Coach

Paul Simister

Business coaching for customer focused entrepreneurs