Out of the Crisis.Org

[Bud Scannavino]

Pricing is a popular topic. One recurring
theme on pricing is the disadvantage that individual shop
owners have in competing with big business.

An important tool in competition, whether it be competition
in business, sports, games or even warfare is knowledge;
knowing what your competitor knows and understanding how he
thinks. That is, can you describe his game plan, and tell
what his strategy is? Not that we should copy what big
business does, but knowing why they do things will help us
generate ideas and strategies for our own businesses. As a
catalyst for new ideas for your shop, here is a simple
description of just two common pricing strategies that big
business uses to compete long term.

The first strategy is called Skim Pricing, which is
commonly used during the first few years of a new product's
life cycle. This is easy to understand by example. Think of
luxury items like electronic gadgets. They are costly when
first released to market, then fall drastically in price,
in steps, over time. But this is not due to the 'factories'
learning how to make them cheaper, as is commonly believed.
The pricing scale is intentional; planned that way, even
before the first sale.

Before a new product is offered for sale, researchers have
already estimated how many potential customers would be
willing to buy it, and at what different price levels.
Everybody has their own budget, but we consumers fall into
general groups of buyers. As an example, when VCRs were
first released, for about $800, everybody didn't rush to
buy them. Only those who could afford to buy at that price
did so.

Then, when all of that group all had their new gadgets, the
price was lowered to say $600, and the next group of
people, with smaller budgets, bought theirs. When they were
all satisfied, the price was lowered again, to say $400,
which scooped up the next group of people who could only
afford that much. And so on it goes, to the product's
maturity.

Therefore, by using skim pricing, a seller extracts the
maximum amount of money that each buyer is willing to pay
for the same, or similar, product. That is the advantage of
it, higher profits. The disadvantage? The extended length
of time it takes to run this strategy. All that time allows
competitors to copy the original product, then to release
their own versions at lower prices, and to start selling to
consumers the 'pioneer' had planned to capture. Sounds like
a harsh game, doesn't it?

A second pricing strategy, of many we could discuss, is
called Penetration Pricing. This too is easy to see by
example. Rather than release VCRs at $800, let's say they
were released at $600. Sales would have taken off faster,
but would have yielded lower long term profits; the
disadvantage of penetration pricing. That is, everybody who
was willing to pay the full $800 for a VCR bought theirs
for only $600. But remember, all those who could only
afford $600 bought theirs sooner. Following that line of
thinking, what if VCRs were initially released for only
$200? The market would have been saturated very quickly,
which would have discouraged competitors from even entering
the market. That is one advantage of penetration pricing,
it scares competitors away from the game. Winner takes all,
so to speak.

These two examples yield some tips for the shop owner
setting his prices. The Skim pricing example merely shows
that markets segment themselves. The astute business owner
recognizes the segments, then takes advantage of that
knowledge.

In fact, markets segment themselves into many categories,
not just along the lines of purchasing power or budgets.
Things like time. What people need their vehicles back in
less than one day, verses who is willing to leave them
longer to insure better quality work. Convenience is
another category. Who values this most, verses who doesn't
care that much - they only want a shop they can trust.
Markets are as diverse as personalities, and the groupings
overlap. Therefore it takes some work to identify specific
segments that any particular shop would have an advantage
in competing for.

What pricing ideas come to mind to 'scoop up' as many
segments of the market as is profitable for your business?

Penetration pricing is used against us more directly, and
spurs many of those Wal-Mart posts. Quick oil change
outlets, tune up chains, you name it, use this strategy.
Certainly the quality is not there, but penetrate the
market they do, and once they have a foothold, they grab
other sales as well. At full price, too.

These two pricing strategies are both based on one thing,
consumer demand at certain prices. That is, what is the
highest price people will pay for a product. It is good to
know those numbers; big business does. Or, how low does the
price have to be to induce buyers to abandon loyalty. We
should know that, unpleasant as the thought is. These two
strategies have no reference to cost.

Still another pricing strategy has been discussed here by
Louis Altazan. It is based on true costs, with every type
of expense figured in. His model ignores demand, the demand
that big business so carefully measures and heavily banks
on. Louis' concept is more easily adaptable to a small
business, so it is well worth reading before making any
changes to your pricing policy.

In fact, the more pricing strategies you are aware of, the
more ideas you will generate for your own business.

Regardless of what pricing strategies a shop decides on,
price structure is only one part of its marketing mix. That
mix, or the stance a business takes in its market, is this:
What the shop sells, where it sells, when it sells, at what
prices and to whom it sells, how it takes payment, what
skill level of employee produces its work, the production
process it uses to gain an advantage, and includes other
things as well. That is marketing, developing a plan to
compete in the market.

Once all that is decided on, then comes the work of
advertising, which is how the shop will tell the world
about itself. For best results, a shop's advertising should
complement it's marketing.

[stephenh26]

Great information.
Makes me realize how much I still have to learn.
Just have to work out how to use these ideas.

[Louis Altazan]

Here's an old post by Bud, that I thought needed to be brought forward for those that might not have seen it.

_________________
Louis Altazan
Owner/Manager AGCO Automotive Corporation
Baton Rouge, LA