One Christmas season, twin brothers Richie and Ralph each opened competing businesses selling (physically) exactly the same products and services. Each of them spent the same money on advertising, attended the same networking events, and advertised in the same places.
But, in their first year in business, Richie made money while Ralph had growing cash flow issues. So, over the following Christmas holiday, while Richie was with his family on a Disney Cruise; Ralph snuck into Richie’s store one night to see why this was the case. Ralph shuffled through a lot of papers until he came upon a fairly thick binder called “Pricing Secrets to make more money than your twin brother in business.” Besides being very perturbed, Ralph was curious and opened the book. This is what he saw:
Secret #1: Never set prices purely based on costs
The customer does not really care what the costs of running my business are. What my customer cares about is the VALUE that we provide to their lives. If it costs $10, but our customer thinks the value is $1,000; then we will sell it for $900 and look like a hero.
That said, Secret 1a is that we must always understand our margins, gross and net: where they are now, where they have been, and where they are going. If we do not like dealing with “the numbers,” pay someone to do this for us. Understanding our books can make the difference between THINKING we are making money; to KNOWING it.
Secret #2: Since we CHOOSE what we sell, decide to sell only what improves the lifestyle of the customer enough for them to pay us a premium price
The companies that are able to command the highest margins understand not just the utility of their products; but also how their products improve the lives of their customers. As a smart company, we realize that what we sell is OUR choice. Everyone says you must “sell the sizzle, not the steak”; but this advice is useless if our product has no sizzle.
If our product IS seen as a commodity, and we find that we cannot make enough money in the business to sustain/improve our lifestyle, we will sell something else. If the new product costs more than our current customer can pay; then we will find new customers. After all, we are not helping anyone if we go out of business because we sold low-priced products to poor-paying customers.
Secret #3: The easiest way to improve the margin on our products is to increase the price above the “commodity-level” offered by our competitors, add an additional value, AND also offer at least 2 premium options well above the price of our primary offering.
These MUST be done together. If we just try to increase the price and add onto what we offer; the customer will see this as a tactic and buy a lower value product from Ralph. But, by offering the two premium offerings; prospects will view us as a premium provider. And, when they compare the revised offering to the higher level offering, two very good things can happen:
– They buy the premium offerings, and are glad that we offered this option;
– They buy the lower priced offering from us, getting more value for themselves while we get more margins and cash flow.
Secret #4: Have a Documented Marketing and Sales Process to take prospects from never having heard of us to the purchase – and Execute it every day.
The reason we can price ourselves above Ralph’s shop across the street is because when customers walk into his shop, their salespeople say “Can I help you”; and people are always “just looking.” When they come into my shop, I have a process to get the customer to discover what they want, why they want it, and then qualify themselves as a serious buyer. Our process does not allow people to “browse”; it asks them to decide whether or not they want a purchase. And, because we let them know that we are OK with “No,” they say “Yes” a lot more.
There were several more Secrets, and Ralph decided that he might need to come back in a few days to read the rest of it. But, for now, he knew what his next steps were; because he could no longer continue to keep funding his business while his brother Richie made big profits.