Pricing Strategy

One of the most important functions of business leadership is to determine their pricing strategy. This is critical beyond critical to determine a business’ survival. Along with a customer service strategy, this will make or break the company. So, we’ll talk about pricing here, then customer service will be up next for our blog.

The basic premise of pricing is simple. You price high if you have something special to offer and don’t need to compete on price. And you price low if you want to break into the market and focus on taking market share, at least in your beginning a new business.

What’s The Old Trick?

As I said in my last blog, the traditional trick is to go in low and raise your prices when you get enough business to warrant it. But it’s not always that simple. People have gotten wise to that, and if you raise your prices, they go out for reality checks. You can lose your customers that way and never get them back. But if you go in high, you may never get them at all.

Understand elasticity of demand first. If you buy something for $10.00 and sell it for $20.00, you might sell one and make $10.00. But if you sell it for $15.00, you might sell three and make $15.00. So, you make more money selling at a lower price. But, you work harder to sell three than you do to sell one. So, you have to make a decision. How hard do you want to work? How elastic is the pricing on what you sell?

What Have I Done?

When I built bedding plus in New Orleans, I chose to have the best prices and work for the market share we needed to be profitable. The market was predominantly owned by a local furniture chain, and there was plenty of space to price our products lower and make good money. So, Bedding plus took the market by storm! And we were profitable in the first year.

I didn’t have to go barebone on all our prices, but our advertising used heavy loss leaders to give the perception of having the lowest prices all around. Mostly, we did that too, but we focused on selling good mattresses at the lowest prices in town. It worked very well!

What Should You Do?

That’s a choice you have to make based on your distinct competencies (unique service abilities) and the market you do or will serve. In general, I recommend pricing low for retail that is easily compared in this internet driven world. Perception is everything, and regardless of your price, buyers will expect good service.

If you are a distributor, I recommend you price commonly used items low, and get a little bit more margin out of the uncommon items. Don’t go too high on anything, or your customers will cherry pick on you. Just be fair! In distribution, I did this and increased sales by over 30%. And, I had the highest margins in the company at the same time. It worked very well.

If you are a manufacturer, you need to price to where your customers can be competitive in their markets. Generally, retailers target high margins, and you have to allow for that to be competitive with them. But the unique nature of your product also has a lot to do with what you can ask for it. If it’s special, it demands a higher price. If not, you may have to price it at a lower level.

If you are a service company, certain services are very competitive, and some are not. It’s a tough decision, but like a retailer, I recommend you go in low to build clientele.

When you have more work (sales) than you can handle, then either expand or raise you prices, or both. Let elasticity of demand work for you, either way.

One More Thing

Especially when starting out with a new company, you won’t likely get the best prices from your vendors. And of course, that will affect your margins. You can mitigate that by making deals with your vendors. At Bedding Plus, we began as a Sealy-only company and enjoyed good prices because of that. So, if you can negotiate something like that, it may well be worth it to you.

Thank you and best regards,

Dave Johnson

Pricing Strategy