Are your products always priced correctly? How do you know whether you are at the “right” price? Should you always price as high as you can?
To discuss the art of pricing, we need to talk “value.” And in fact, it’s actually perception of value that drives customer buying, forcing prices higher or lower. Whether you sell fuel, propane, store goods, oil or any other product, there are common price to value scenarios that can help determine pricing. Let’s examine those scenarios.
High Price, high value – Bear in mind that the driver in this equation is high value. The perception of high value allows for a higher price than that of any competitor. In essence, a customer feels the value they receive from a product or service justifies paying more. For instance, Vail can charge considerably more for a day of skiing than Breckinridge. Why? The skiing, the mountain and the snow may be virtually identical, but there is a perception that Vail is worth more. Notice it doesn’t matter what owners or employees think about value, only customer perceptions count.
Now let’s look at the flip side of perception using an example from the propane industry. Many propane marketers complain that margins eroded when fuel marketers began purchasing propane companies. Fuel marketers, unaccustomed to 50-cent-plus-per-gallon margins, slashed prices to gain market share. They figured even 25 cents was great profit! Notice how these owner perceptions drove pricing. A fuel marketer’s perception of “good” margins was completely different from old time propane-only operators.
Let’s flip over to the convenience store industry. If you think back to when the industry first began, value drove pricing. A customer would pay more for a candy bar at the c-store than at the grocery store because of timesavings. This philosophy worked until competition proliferated and stores started cutting prices.
Can high price, high value still work in today’s price-conscious marketplace? Absolutely! As long as a customer perceives extraordinary value, they will pay more. We see this most commonly in lubricant buyers. Lubricant buyers don’t mind paying extra for quality and service. But, let a competitor come into the market with equivalent quality and service, and lower price, and the customer will move. Eventually they will see there is no perceptible reason to pay the extra price and you lose the customer.
High price, no extra value – This is actually the lubes example after the competitor moved in. This equation equals no sales! You simply can’t expect a premium price for something that doesn’t bring extra value. The problem occurs when we used to have special value, but competitors meet or match that value and with a lower price. If we are counting on high value to drive high price, we have to consistently modify our offerings to stay perceptibly better, remaining at the top of the value chain.
Low price, high value – If a seller has high value, why wouldn’t they want to raise the price to enjoy higher profits? Meridian commonly sees instances of marketers “leaving money on the table” because they offer terrific value through superior service and sites, but then match inferior competitor prices. This is not smart. Typically, there is an operational cost to the extra value, whether that is in labor or invested capital that needs to be recouped through price. Don’t match the low-ball competitor if you consistently offer higher value.
That is not to say that you can’t play the price-match game occasionally. Bill Douglass of Sherman Texas got quite an ovation at NACS when he mentioned he takes the fun out of competitor grand openings by slashing his proximity location prices right before a grand opening. That strategy insures the opening price is no big deal and his competitor doesn’t get to steal his customers!
Low price, no extra value – There is at least 20% of the marketplace that simply wants cheap prices and nothing else. The problem with playing in this bracket is that you are up against some formidable competitors that typically have purchasing price advantage over more modest operations. It is almost impossible to win at this game.
Moderate Price, no extra value – You can get away with this strategy until a low price competitor comes to town. Then, it gets ugly! So, why be there?
Moderate Price, high value – Again, the question is, “Why not raise prices if there is a perception of high value?” It’s easy to test this theory with modest incremental price increases and closely monitored velocity.
Moderate Price, moderate value – Ah… that coveted middle ground in Middle America! The problem with this strategy is that you won’t have very many customers. Most customers want either high value or low price. Most won’t settle for middle ground.
In order to know where you stand on the value chain, and fine-tune your prices, you must regularly monitor competition. Value is comparative in the consumer’s mind, so constantly check in with customers and when possible, shop the competition to see how your value stacks up. Then, adjust your value and/or prices.