Whether your business leans toward luxury or low-cost, setting the right price for your products is critical to success.
by Sherron Lumley.
In the exclusive realm of artisanal furniture, Steven Garfield, owner of Steven Garfield Fine Furniture in Stanton, New Jersey, is among the most elite in the country. “When you’re dealing with luxury, it has to be as perfect as humanly possible,” says Garfield, who is currently working on a custom dining suite for the Johnson family, of Johnson & Johnson fame, a commission that “could be in the $100,000 range.”
Pull-Quote.pngStill, even in such a high-end market, Garfield acknowledges his company is not immune to robust discussions about price points. “We debate it all the time,” he says. Perhaps that’s not surprising since hanging a price tag on a one-of-a-kind piece of custom furniture can be difficult. “I don’t like to think about money,” he says, but it’s a necessary evil for someone who admits with a chuckle that “if I were to keep a time log, there are times I would be making less than a dollar per hour.”
“Most of a business’s customers are relationship or value-based, but by focusing mainly on price, you run the risk of converting them to price-based customers,” explain price consultants Reed Holden and Mark Burton in Pricing With Confidence: 10 Ways to Stop Leaving Money on the Table. The authors urge that companies consider value-added pricing, which focuses on the total value delivered to the customer, rather than more traditional cost-plus pricing, which tallies the cost of the product plus a set mark-up.
Whether operating in an upscale or cut-rate market, getting the price right can make or break a small business. A price strategy is step one in getting to that profit sweet spot, the point that keeps customers happy and demand high, while still stoking business growth. Each business is unique, and strategies must be tailored to demand, the market, competitors, customers, perceived value, actual value, and cost. A look at three strategies for small businesses follows: premium pricing, competitive pricing and product differentiation.
There are a limited number of pieces that Garfield and his staff can create in a year. The furniture is made from old-growth trees that have fallen naturally at the end of a 100 to 200-year life span. Each piece is handmade in a process that can take several years.
“I feel more confidence in the higher price point. A life is going into it,” says Garfield.
Premium pricing is appropriate when there is something unique about a product or service, and luxury, exclusivity and high quality are all associated with perceived higher value. Premium pricing strategies may mean a longer sales cycle, but better margins and higher profits will result from a smaller revenue base.
People are more price-sensitive about the necessities of life and less price-sensitive about the niceties. Whereas fine furniture is a luxury, children’s clothing is a necessity. On the other side of the country and the other end of the price point scale, Cristina Berry is the owner of Pipsqueak Resale Boutique, in Vancouver, Washington, a name-brand children’s clothing resale shop. Baby and children’s clothing at Pipsqueak starts at $1.50 per item and peaks at $15.00. The store also carries new and resale baby gear such as strollers, mobiles, and bouncers.
“I’m a mom of two kids and I know the economy is tough right now,” Berry says, “You have to be priced right or customers will go somewhere else.”
The more competitive the industry, the less flexibility there is on price. Even so, having the lowest price is not necessarily the best strategy. Finding the right price point starts with evaluating the competition based on the full package of products and services offered.
“Compared to our competitors we are low to medium priced,” says Berry. “We add value by offering better quality and service.” The merchandise at Pipsqueak Boutique is put through a triple-check process including steaming and sterilizing before stocking the sales floor, something her customers know about and appreciate, she says.
Customer care is another way to add value. “I want people to know that I care, and hope they will get a more personable feeling when they come into my store than they would at a larger competitor,” she says.
“If your product is a necessity, you need to focus on the value of your product compared to your competitors,” writes Laura Lake in her book, Consumer Behavior for Dummies. “You need to prove why consumers should spend their hard-earned money to purchase your product rather than your competitors.”
Product differentiation strategy
“You want to be sure that the market you’re targeting has the buying power to purchase your product,” Lake writes in her book. “When evaluating buying power within your target market, consider providing several quality levels of the same types of products that match the buying power and the demand in a given sector of the market.”
By carrying both new and used items, Pipsqueak’s is, in effect, pursuing a differentiation strategy, offering products at different price points.
The differentiation strategy applies to luxury goods as well. For those who admire his work but are not prepared to drop six figures on fine furniture, Garfield has more attainably priced pieces in the collection starting at $7,500 for tables and $1,500 for chairs.
It’s not always the lowest price that pulls the best sales. But how do you find that perfect price point if your business isn’t a discount house or a premium outfit? Sometimes no amount of pencil-to-paper calculations or estimates of customer perceived value will lead to a specific best price. At this point, some actual information is needed—real data, not just theory. Testing different prices to discover what customers are willing to pay is the purpose of conducting a price test.
In an ideal price test, identical items would be priced differently at the same time in the same market to discover which price delivers the best results, but in a solo retail shop, this isn’t going to work. The next best scenario is to use different prices on similar pieces of merchandise. For small businesses selling online, the new era of real-time Internet pricing, where prices can change from minute to minute, makes online sales the ideal testing ground.
The price is right
Once the right price has been established, stand firm. “There is only one way to present your price,” says Tom Reilly in Value-Added Selling. “Use these three words only: ‘the price is…’ Anything other than that creates doubt in the buyer’s mind,” he says, adding, “The time to exude complete confidence is when you’re asking people for money.”