April 2003
Volume 45 Number 4
 

Bottom Line: How to Set Prices -- Are Yours Too High or Too Low?
by Carl Davidson   Pages: 

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.

‘Cost up’
This method looks at your costs and calculates what a good margin and selling price would be without taking competition or other factors into account. It’s a good place to start.

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.

Profits
Once you know your total costs, add on what you want your profit to be. Don’t be shy, I know of many companies that closed because they ran out of money, but very few closed because they charged too much. Remember, you deserve to make money for your time, capital and risk you’re taking to be in business. Once you’ve added all your costs and what you want to make, you have a selling price. It’s traditional in the water equipment industry to mark up the dead cost (i.e., the cost before any of your expenses—the factory invoice) by 300 to 400 percent. For example, if you buy a reverse osmosis (RO) system for $400, many dealers would set their price at $1,200 to $1,600 installed. See how this rule of thumb compares to the “cost of” price you arrive at in your calculations.

Break-even point
When you have a price, give yourself a break-even analysis. How many do you need to sell to break even? Does this number seem about right, too high or too low? This is your first check on your price.

Discounts
Next, you have to decide about customer incentives—to discount or not to discount?

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.

Competition comparison
Once you have your “cost up” price, I recommend you make a list of all your competitors and either you or someone you hire should shop them thoroughly to get their prices. When I was 6 years old, my first job at my father’s store was to go to all his competitors’ shops and make a note of their prices and report back. I still think this is an essential yearly exercise. Yearly? Yup, if you don’t stay current, your competition may change and you won’t notice.

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.

Market survey
My friend, Allan Nosel, of TNT Training, did an interesting exercise for Culligan that I recommend you do. He wrote to customers and people who didn’t buy from the company and invited them to come to a three-hour market survey meeting. They paid the people a fee of about $20 each and got about 50 people to attend. That means they spent $1,000 on the survey, but they got far more than their money’s worth.

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
OK, you’ve tried several methods to calculate a price for your products. I have good news. The universe has a system of checks and balances that will tell you if your prices are too low or too high. You have no need to fear, or guess and sweat. Let’s take a look at how the market tells you the price isn’t right.

Symptoms of high prices
Losing sales to competitors—Make sure you’re asking people who don’t buy why they didn’t. We suggest the only way to ensure you know what’s happening in your marketplace is to have a manager or owner call every person who doesn’t buy and ask why not. We suggest you call the very next day and find out why they didn’t buy. If you find a lot of customers saying they bought from competitors because your price was too high, it tells you one of two things. First, your price may be too high. Second, your staff may not know how to sell the value instead of the price. The way to differentiate these two symptoms is analysis. If your whole staff runs into a lot of price problems, it may be too high. If one or two salespeople run into the problem and others don’t, it means those staff members need to be trained on selling value. Beware—never listen to what your salespeople say about your prices. Only listen to your market demographics since, after all, customers make final decisions with their wallets.

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
It’s funny how many dealers worry whether their prices are too high but few ever think their prices could be too low. Low prices rob you of net profit you should be enjoying. Here are some of the symptoms of prices that are just too darn low:

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.

Conclusion
Carefully setting prices based on fact, not opinion, is one of the biggest factors in the success of your dealership and how much money you make. We hope the points discussed here will help you make all the money you deserve.

About the author
Carl Davidson is president of Sales & Management Solutions Inc., a company that specializes in training, recruiting and consulting for the water equipment industry. For more than 20 years, 4,000 companies in seven countries have used his services to increase sales and profits. Davidson can be reached at (800) 941-0068, email: davidson@salesco.net or website: www.salesco.net


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