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Price Points

Wednesday, January 06, 2010
Secret Strategies For Generating Sales In A Downsized Economy
By Mollie Neal

Selling products and services to today’s budget-conscious customers isn’t easy.

Many micro-business owners have been slashing prices in an effort to drum up sales. While this strategy may work to generate short-term revenue, it could well impede chances for long-term sustainability.

Instead, some micro-business owners are creating growth by revamping their product and pricing strategies. But, before you start making any drastic changes, consider these guidelines.

Beware The Drawbacks Of Deep Discounting
Sure, offering periodic discounts is an effective way to generate interest or clear out inventory, regardless of whether you sell products or services to consumers or other businesses.

On the other hand, “desperation pricing is a classic mistake,” says Mark Burton, co-founder of Holden Advisors pricing strategists in Concord, Mass.

Unless you pride yourself on being the cheapest guy on the block, sustained lowball prices can quickly erode profit margins, fuel price wars among competitors and create a feeding frenzy among customers who begin negotiating for every penny, warns Burton.

Raising prices as the economy rebounds then becomes nearly impossible, Burton says.

Experts predict that today’s frugality is not a passing fad, but a mindset that is going to last. Loyal customers have long memories and will question whether or not you’re credible and trustworthy, says Burton. Many simply won’t pay the higher prices without seemingly just cause.

“Most business owners don’t pay enough attention to pricing,” says Michelle Villalobos, owner of Mivista Consulting, Inc. in Miami, Fla. “Price is simply the amount of money that a buyer is willing to give up to obtain what he or she wants, needs or desires. The easiest way to become more profitable is to price better.”

This calls for some creativity, yet it can be done.

Appeal To Today’s Discriminate Buyer
Today’s customers are more discriminating and demanding, says Villalobos. So, the real key is offering value without sacrificing profits. Here are four ways to do just that.

1. Offer extra value.
Maintain prices but add something to make the sale more attractive. Choose an item or service that doesn’t cost you a bundle of money, but that has a high perceived value. A picture framer, for example, could include free engraving. Retailers could offer a gift with purchase, and consultants may give a free, extra half-hour of their time.

2. Use price discrimination.

Offer different prices depending on demand. Volume discounts for multiple orders and rush fees are classic examples, says Villalobos.

If a customer needs something right away, and you have to put other work aside, you’re providing value by servicing the customer’s immediate needs. Segmenting prices by time is another option. For example, offering free Wi-Fi service throughout the day in your restaurant, but charging a fee during busy lunch hours, is a way to capture more profit without incurring additional expense.

3. Dress it up. Offering money-back guarantees is a great way to gain the trust of potential customers. Such promises can also differentiate you from competitors. However, “you have to be secure and confident that you’ll be able to deliver on your promise,” cautions Villalobos.

Another way to dress up your offerings is to provide more choices. Bundle services and offer a discount. Or break up services and charge a somewhat higher fee for each individual service.

4. Discount wisely. If you really need to offer discounts, Villalobos suggests cutting prices on low-margin products
or services.

“Lose a little on it and consider it a marketing expense to boost sales, and retain prices on high-margin offerings.

“It’s important to look at how prices tie in to the value and satisfaction you are giving the customer or the whole customer experience,” says Villalobos.

Build Trust For Long-Term Sales
Bonnie Nolan, co-owner of A Taste of Wine in Miamisburg, Ohio, listened when her customers started requesting less expensive bottles of wine in the $10 to $20 price range. She worked with distributors and vineyards to find high-quality libations that fit into her customer’s budgets. Now, about 75 percent of her inventory is value-priced wines, compared to the previous 50 percent.

“We have been in business for two years and continue to pick up new customers. Word is spreading, and sales are continuing to grow,” says Nolan.

She admits that it’s been challenging, yet fun, to find new wines she can recommend to customers.

“It’s not just about getting cheap wines,” Nolan says. “They have to be good because our reputation is at stake.”

Customers trust Nolan to stock good wines at reasonable prices. Nolan believes she’s building loyalty by offering customers quality and value. And she’s probably right.

“Research indicates that trust is the No. 1 predictor of customer loyalty and longevity,” says pricing strategist Burton.

Jump Ahead Of The Competition
If you appeal to customers with new offerings before your competitors do, you can boost profits and expand market share.

“Innovation is at the heart of profitability,” says Burton.

When the economy was rocking, plenty of customers walked into the RikRak salon on Brickell Ave. in Miami, Fla., wanting fashionable and pricey hair extensions. Those extensions typically cost $600 to $800 and last two to three months.

When the economy slowed customers couldn’t afford the luxury, and business quickly dropped, says co-owner Raquel Watters.

Instead of watching sales erode, Watters contacted the hair extension manufacturer and asked if there was a way to extend the life of the product. She learned that stylists could remove the extensions, wash them, blow-dry them, and reattach them to the hair shaft up to two times.

As a result, Watters began offering “Recession Extensions.” For a modest $150, customers can have their extensions removed, washed, blow-dried and reattached. And they can do that several times. Now a customer can purchase extensions and use them for six or seven months for just $900.

“Sales skyrocketed,” says Watters. “No other salon is offering the service. We are getting new clients who were getting their hair done elsewhere. Our numbers doubled, and we’re doing more extensions than ever before.”

A few years ago Watters added a small boutique and a wine-and-coffee bar to the salon, which have helped drive incremental sales and also set RikRak apart from competitors. She now uses these amenities to offer a free gift with purchase. Customers who visit the salon on Thursdays can get a wash and blow-dry for just $50 versus the normal $55 to $65. They also get all of the Sakitinis—sake martinis—they can drink.

The sake manufacturer sponsors the event and supplies the wine. The cost Watters incurs for shampoo and electricity for blow-dryers is minimal compared to the payback. Customers have a great time and often purchase boutique merchandise or salads and sandwiches from the bar.

The key to success is to “preserve the integrity of your high-value work or products while figuring out how to continue servicing clients or customers with limited budgets,” says Burton.

You may need to try different ideas to see what resonates with your customers and make adjustments along the way. But with a little creativity, you can find real opportunities to increase sales and profits.

Mollie Neal is a Long Island-based freelance writer who specializes in small-business issues.


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