Getting the price right

blog-images-coinsEstablishing the right pricing structure for your wet leisure business is one of the most important business decisions that you have to take. This article looks at some of the factors that you should consider when making those decisions.

Price is a sensitive issue.

There are probably very few customers in the world who would say, ‘Oh, the price isn’t important to me,’ and actually mean it.

But just because almost everyone is price sensitive to some degree, it doesn’t follow that price is the most important aspect of any purchase decision.

There are some customers who always focus on the price and solely the price. The question is; do you want to do business with that sort of person?

To compete solely on price requires your business to have the lowest possible cost base and competing on price alone has one other magor drawback.

The price of something is quantifiable. Unlike ‘value’ or ‘good service’, a price is a number and if you enter a market competing on price alone then there is one thing that you should bear in mind.

You are either ‘the cheapest’ or just ‘cheap’.

Your customers will tell you if you are too expensive, but you will never know if you are charging too little.

For most businesses, if you aren’t loosing a few customers on price then you are charging too little.

There will always be people who shop around till they find the rock-bottom price. If you aren’t loosing any of their business then perhaps you are the lowest price in your market.

If that’s the case; did you choose to be or is it an accident?

So how do you go about setting the right prices?

There are two basic methods of pricing and they are cost-plus pricing and value-based pricing.

Cost-plus involves adding all the costs that your business incurs to be able to offer that particular good or service to the customer and then adding on a mark-up or margin.

Value-based pricing is determined by how much the customer is willing to pay. What do they value that service or those goods that you are offering at?

Common sense suggests that a wet leisure business should use both methods across the range of goods and services that they trade. Chemicals and basic products are best suited to the cost-plus method but an installation or perhaps high-end products could well be priced under the value-based method.

In either case there are some steps that you should take first before making decisions.

Do your research.

Check out the competition. What are they charging?

If you set your price too high, you could be giving the sale away, but if you set it too low you are jeopardising your margin.

When you look at your competitor’s prices you should be aware that, if they are much lower than yours, they might have lower fixed costs or they might be selling that product at a loss in order to attempt to pull in new customers.

Trying to match their price without knowing the structure or reasoning behind it could be a costly mistake.

It can harder to find out what the competition are charging for an installation or a build but you should be able to see fairly easily whether they are aiming at the top-end of the market or are aiming at the more budget conscious customers.

Cost-plus pricing.

Obviously the first thing to do is to calculate your costs.

You should be careful to ensure that that figure includes all costs, both fixed and variable ones.

Its easy to see how much a simple product like chemicals for instance costs you to buy from your supplier but then you need to add in an amount that that sale will contribute to fixed costs and overheads such as your premises, your utility bills and staff costs.

If you fail to do that, then those costs effectively come out of your profit margin or mark-up and that means that the margin becomes eroded without you being fully aware of the fact.

If you do your sums on volume, rather than a single unit, it becomes easier to see what amounts you have to include to cover fixed costs.

For instance, if your total chemical sales accounts for 25% of your turnover then they should cover 25% of your fixed costs. You can then divide that figure down to a unit amount.

It may end being only a couple of pence, but if you fail to include that in your cost-plus pricing then you are paying that few pence out of your own pocket on each and every sale.

The mark-up that you set on top of that final figure can be decided by past experience or practice or industry norms.

You can have a higher mark-up if your fixed costs are particularly low or if the brand value and reputation of your business is adding value by making customers more motivated to do business with you even if it is at a slightly higher price.

Value-based pricing.

Value-based pricing is usually applied to services – although if you are offering rare or high-end products it might be applicable as well.

You obviously still need to know what costs you are incurring on the job, be they staff time or materials, and you need to include a percentage of your businesses fixed costs that should also be covered.

The difference is that then, rather than apply a percentage margin, you add a sum that takes the total up to what you believe the customer will see the service as being worth to them.

Value-based pricing is less rigid and presents the opportunity for a much greater margin of profit but still needs to be watched closely.

Value-based pricing takes a lot of intangible factors into consideration.

Does your business have a particularly good reputation that will mean customers place more value on your services?

Are you solving a problem that the customer rates as highly valuable such as an emergency service call out during the weekend or in the evening?

Are you adding first-rate design skills to an installation or build or have you sourced products that are unique in the marketplace?

Cutting your prices?

Sometimes, especially in price-sensitive industries like ours seems to be, matching your competitors’ prices can look like a necessity.

Before you just slash your margin, weigh up how much of a hit on price you can afford to take without putting your long-term growth in jeopardy.

It’s by far the best policy to show the price cuts as discounts or special offers as that is seen by people as you making efforts to help loyal customers through difficult times.

The other benefit is that you will need to increase prices again in the future and that could be more damaging to your long-term survival than price cuts now.

If you package lower prices as promotions and special offers then customers will understand that those deals don’t last forever.