Volume 45 Number 4
Bottom Line: How to Set Prices -- Are Yours Too High or Too Low?
Never let others talk you into setting prices without careful analysis based on facts. Keep in mind, only you know your market and business well enough to set prices. Others have their own best interests at heart. Here, we’ll discuss not only how to set prices, but symptoms you’ll see if you set them too high or too low.
The first step is to know your expenses. Add your cost of buying the equipment, freight (in and out), prep and installation, and other supplies like pipe and fittings. Then, add your fixed and variable costs per unit to determine your true costs. Do this carefully, as you’re paying for every item you forget, i.e., it comes out of your pocket.
Many dealers like to sell and give an amount off to close the sale. It generates a reason to buy. Others like the one-price method. Make your decision carefully. Neither way is unethical, in my opinion, but is simply a decision as to how you want to be perceived by the public and if negotiating is exciting or a pain for you. After working with thousands of dealers, I can tell you both programs work equally well with a well-trained sales force, and both work poorly with a poorly trained and managed sales force. Regardless, during your price calculation, you need to include this if you’ll be discounting.
The easiest way is to get a new employee not known in the industry to call all your competitors and have them come to their home for a demonstration. Have your employee note their price for sale and rental, try negotiating and see how low they’ll go and make notes about the product, warranty and impression they made. Some of you won’t do this. You may feel it’s unethical, takes too long or isn’t necessary. Realize, every family you try to sell has probably seen three of your competitors. If you haven’t, you’re at a disadvantage. If you set prices without seeing your competitors, you’re making a mistake.
Now, am I saying you have to be the lowest? Not at all. In fact, in every town there’s one dealer selling softeners for $700 and one selling for $4,500. My experience is the $4,500 dealer always sells more if he has a properly trained staff with a good story. The majority of sales, though, often go to those somewhere in the middle. Part of this story is recognizing why your product is a good value and knowing how it compares to your competitors. After you get all the prices and information on your competitors, take a look at your prices and see if they’re a good value or if you should raise or lower them.
Realize, too, rental and repair prices are most likely compared quickly by consumers using the yellow pages or newspaper. You definitely need to know your competition in these areas and train your staff to quickly position your company pricing as the best value.
They asked attendees in writing what they thought was important in equipment or dealership, what made them buy, how they made the decision, what they thought equipment should sell and rent for, and hundreds of other questions. The result was a plethora of answers far different than the company would have guessed. The dealer learned more that evening than he ever had before. The changes it made in what it charges, what it emphasizes in the demo, and many other factors increased sales dramatically and shaped the company’s success for years to come.
We recommend you stop making pricing and marketing decisions based solely on what you and your staff think. Why not make an investment and find out what the people who write our paychecks—the customers—think?
Checks & balances
Symptoms of high prices
High cancellation rates—If your team is prospecting and closing reasonably hard, you should expect a certain level of cancellations the next day due to buyers’ remorse. No cancellations mean your staff isn’t closing and just writing up the people who ask to buy. We think average cancellation rates should be between 20 and 30 percent. If your cancellation rate jumps for all your staff, it may be a symptom that your price is too high.
Salespeople who fail with you do better for a competitor—If you have salespeople who cannot successfully sell for you but are successful if they worked for a competitor, that may be a symptom your price is too high.
Your gross is higher than industry average but volume is low—If your gross profit percentage is higher than the industry average but your volume is low, it’s a symptom of high prices.
Closing rate drops—The national average for closing a typical sale (that is, where some sales were generated and some weren’t) is 33 percent. If your closing rate is dramatically lower, it’s a symptom of poorly trained staff or prices that are too high.
Symptoms of low prices
No complaints from salespeople—By their nature, salespeople complain about the price. Beware if you’re not getting regular complaints that your price is too high.
Higher volume than expected vs. lower profit—If you’re selling more units than you expected but not making the net profit you projected, this is a symptom of low prices.
Low cancellation rates—If your cancellation rate is too low, it could mean your staff doesn’t close hard enough or your prices are too low.
People who shop and then call you—If your company has a lot of prospects who refuse to buy until they shop around and then call and ask for a deal, it’s not a cause for celebration. It probably means your prices are so low that when they shop around, they don’t find anyone lower. If people shop and decide you’re the best value, offer the best product or service, that’s good. But if a large percentage of people who shop come back, then your prices are probably too low.
Competitors' salespeople apply for jobs—If a lot of competitors or their salespeople apply for jobs, it probably means your prices are too low and they cannot sell against you. Some dealers see this as a huge victory and it is, if you’re making money. If your profit is lower than you like and this is happening, it’s time to raise your prices.
Closing rate is too high—If your closing rates are much higher than 33 percent, it’s probably a symptom of no prospecting or low prices. High closing rates may be a sign of top closing skills, but if a lot of team members are closing higher than the national average, I would look at the other symptoms to see what’s out of whack.
About the author
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