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Instant Profit | Why it's Easier to Raise than Lower Prices

Posted On - 17/12/2012 15:13:05

Price is nothing short of a lethal weapon. Yet many Indies play with it like it's harmlessPrice is nothing short of a lethal weapon. Yet many Indies play with it like it's harmless. Some believe being a "bit cheaper" is a good thing. That it'll make people buy. It doesn't. What's more we've the hard data to prove it.

For example, we can prove that selling just 5% under the "going rate" needs 28% more volume to make up for what the discount gave away!

Concerned? You should be. This blog is all about the genuinely monumental problems created by discounting.

Promoting on price attracts bargain hunters. People whose only interest is price. Loyalty? How 'good' was your last price? Nothing else impresses them so you end up under relentless downward price pressure. And you do the very thing that's bringing you the trouble.

Being cheap doesn't just bring in problem customers, it doesn't result in increased volumes - the rationale many Indies give for being a "bit cheaper". Our recent Price Comparison shows those participants most dissatisfied with their pricing are those selling at the extreme low end of the scale.

But the Price Comparison went further. It showed discounting doesn't make commercial sense. Overall you lose money. Plus leading promotions with price sends a loud contradictory message. Your market wants what you do: a quality, expert, service. Yet how can you be when your prices are low? Good isn't cheap. It doesn't work.

You have to revise how you think about price. You're playing with a lethal weapon that could well end up killing you. The bottom line is this: don't use price in the hope it'll increase sales volumes. The data shows it simply doesn't work. What price does do very well is maximise profits.

The going rate is too high

Now, we're not suggesting profiteering here. We're not suggesting taking unfair advantage. No. What we're suggesting is charging the "going rate." Here's why.

We were with a struggling retailer just yesterday. A business trading 18 months and still no wages being. If anyone needs to make money, this business does. So what happened? Pretty soon after shaking hands we asked: "How do your prices compare with your local competitors?" "Oh, we tend to be slightly cheaper", came the reply. "OK," I said, "Why don't you charge the "going rate" for things?" The retailer looked at me sternly: "I couldn't do that – I think the going rate is too high."
 
Now, we could debate the philosophical reasons for such an approach. About what a "justifiable" level of profit on anything is. Many of you feel it's only right you don't do anything to rip-off people. And we absolutely agree with you. Because what goes around comes around. A local business serving its local community can't do it: it'll kill it.

But, you have to bring your ideals to life with a business head and not with one simply full of moral principles. Afterall you need to make a profit and put food on the table. There is a third way.

Discounts don't nibble at profits, they gobble them up!

Discounting costs far more than most thinkMany of sell at around 30% mark-up. So let's assume "slightly cheaper" means 5% less than the going rate. Anyone like to guess how much he's giving away by not price matching? Can't be much, can it?

Well, this is just a matter of plain arithmetic. Ready?

Discount 5% on something with a mark-up of 30% and its profit is reduced by 22%.

Or to put it another way, by selling "slightly cheaper" the retailer in question would need to sell 28% more units than his competitors to match the profit they would make.

Are we for real? Oh yes. Just look at the graph. Or download our free tool: Pricing Change Sales Tool. You too can play "just how much does discounting eat my profit?"

We were aghast the first time we worked this out. But it's real - no trick - just pure arithmetic. And the frightening thing is, the lower the original mark-up, the worse it becomes. A few weeks ago we were talking with a customer who marks up at 20%. If he were to offer a 5% discount he'd need to sell 43% more units to profit match his competitors!

Could it be some of you are finding it so tough through your own actions.

 

Posted On: Dec 17th, '12

PC Input

Joined:
2423 days, 18 hours, 11 minutes ago

Posts: 80

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John, I think your blogs are a brilliant source of info and inspiration and have used some of the techniques myself however, when it comes to going rate - here's the issue that faces me and I'm certain a few others: take the current budget laptop (Toshiba Satellite Pro C850-1CW)- it's probably a really good seller because it's ideal for the kids. However, Target sell this to us at 215 ex. VAT. Online this same laptop can be bought from Servers plus at just 181.64 ex VAT and comes with FREE delivery. Can also be bought from BHS for 230 ex. VAT including FREE delivery and from Laptops Direct for 223.31 ex. VAT with FREE delivery. These were just the main ads that appear on right hand side on Google - so i guess the question is - whilst us independents can offer great after service and we know what we are doing with the advent of mobile shopping where the best price is simply a barcode scan away i am wondering where we are going to be left when price starts to become the main factor on goods. i sell that laptop for just 294.49 and after paypal costs and VAT difference make just 20 on the product. maybe it is me - maybe 20 is too much to want for all the work I do in the background on the shop but it's what i consider a reasonable profit that will enable me to carry on investing in training, technology and running costs. Incidentally, I have not sold any of these machines yet and I guess I believe the answer is in the price? Would love to know your thoughts on the subject as well as anyone else's. Martin
  
Posted On: Dec 18th, '12

Albany

Joined:
2577 days, 23 hours, 34 minutes ago

Posts: 7

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Hi Martin.., I think we all have the same problem. In the past we were retail and wouldn't sell at such a small profit, not with the work that we would do and the support we offer. I would and still do tell customers that our cheapest laptop is 400+ but you can take it home, plug it in and play with it straight away, we create the recovery discs and put on security and all of the windows updates... but I also tell them that if they buy from PC world and want it setting up and configuring we can do it at 45. I think the main thing to remember is that we can't always be competitive with the big players, and if you tell your customers that you buy in one's and two where as PC world buy in the thousands they do understand - well from a retail / face to face environment. Online is different of course but why not put a "reason to buy from us" selling points on your site. Hope this helps... you are never alone :) Regards Steve
  
Posted On: Dec 18th, '12

Target Paul C

That's a good question, Martin. In fact, it's such a good question we're writing a blog on it. Or to paraphrase Winston Churchill, we would have posted a shorter answer but we didn't have time. Incidentally, one of the prices you quoted looks wrong, but otherwise we did the same search as you and found the same results. The upshot is that you could match the cheapest online price and make about 8 before Paypal costs. The obvious questions are should you have to and why would you bother. Don't worry, we're not ignoring the question (far from it). Bear with us and we will have the response posted tomorrow. It'll include a couple of ways you can differentiate the offer promotionally plus how you would tackle the price challenge if it were raised in-store. Regards Paul
  
Posted On: Dec 19th, '12

PC Input

Joined:
2423 days, 18 hours, 11 minutes ago

Posts: 80

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Thanks Folks - looking forward to the blog post on it - sometimes it can be as simple as having someone else's perspective on it. That's a good point Albany about the why buy from us - and you know what - I haven't actually got one of those - simple stuff to implement but aren't those the ones often overlooked!! lol Well - thanks again and look forward to the post Martin
  
Posted On: Dec 19th, '12

PC Input

Joined:
2423 days, 18 hours, 11 minutes ago

Posts: 80

Rank:

why buy from us now implemented!! - thanks again Albany for the tip
  
Posted On: Dec 19th, '12

JohnC

Joined:
2555 days, 17 hours, 49 minutes ago

Posts: 468

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Paul's been beavering away on this. For his thoughts see It's Cheaper on the Internet
  
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