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July 23, 2014

Mastering the fine art of pricing

Look at it from the dynamic of dollars and ‘sense’

by Wayne Williams

Price, price, price, price, price, price, price... everybody is talking about tire prices. Independent tire dealers have a lot to say about this subject, and rightly so. Tire dealers are talking about all phases of tire pricing, what they pay for tires and what they charge (or can charge) for tires.

Several days ago I was talking with a successful independent dealer about pricing. He and I agreed that what we used to call “cheap customers” have now been divided into three new categories: “cheap, cheaper and more cheaper.”

He also made an observation that some customers aren’t cheap, they are just broke. He reiterated something I keep hearing from dealers, “You have to read the customers.” I think what this “counter intelligent tire expert” is saying is, to close each sale it’s more important than ever to read the customer. If each customer is “custom,” then who needs an overall “pricing strategy.” The answer is, everyone.

Pricing is so much more then selling price minus cost of good sold. Let’s look at pricing from a different dynamic, let’s look at “dollars” and “sense,” let’s look at the “math” and the “psychology” and how a sound strategy, pricing perceptions and individual consumer needs work together.

Keep it balanced

During difficult economic times, it’s more important than ever to have a strategy that balances tire units and profit margins. This is an age-old debate, and I’ve seen many store locations get out-of-balance one way or another.

Too much focus on gross profit dollars or percentages, and the units diminish; too much focus on moving units and margins diminish. My history tells me that margin follows the units. If your location is a tire and service outlet, then every tire unit is important. When the mind set becomes it’s OK to let tire unit sales drop in order to save gross profit, it is a slippery slope.

So let’s begin with this: Every tire deal is different, every tire customer deserves your full attention, and almost every tire deal is financially important. Current economic conditions, the Internet and competition are putting real pressure on each potential tire sale.

In my recent conversations with tire dealers, I’ve not heard anyone tell me they have a lock on a solution for pricing tires either from a procurement strategy or a pricing strategy. Dealers are commenting they are spending more time buying tires than ever before. Having the right price point tire in stock or having access is more critical than ever.

Over the next several months, I’m going to share some research I’ve done, solutions from other dealers, and some of my personal experience.

My perspective in this series of pricing articles is that tire pricing is a multi-dimensional discipline and is considerably more complex than simply the difference between what you pay versus what you charge (gross profit).

I hope to reduce pain points in the tire pricing channel. Topics to be covered include:

• Bundling products and services.

• Differentiation/limiting choices.

• More is more, and less is more.

• If you don’t know, don’t wing it.

• Don’t let anchor pricing be an anchor.

• Pricing variables affect price perception.

• Avoiding unintended consequences.

• We’re pricing customers as well as tires.

Pricing is more than a gross profit exercise, it’s a strategic exercise, a psychological exercise, a competitive exercise, and it can be a painful exercise. Pricing is everything, but pricing alone is nothing. We spend entirely too much time talking about pricing and complaining about pricing, and not enough time developing a real pricing strategy, a strategy that matches the overall business strategy and current market dynamics. All pricing must be measured against a variety of variables in the marketplace.

Pain points must be considered and reduced. Physiological studies over the late 1990s and early 2000s in neuro-economics indicate, among other things, that consumers will shop ‘til it hurts. Brain chemicals send signals back and forth in the brain that have a definite impact on a customer’s buying decisions.

In one case, customers don’t like add-ons. Literally, it can be painful for customers to listen to sales staff rattle off a bunch of add-ons to a tire sale versus a simple bundled offering. This is about the process and how it affects price.

Studies indicate that the ultimate price may be less important than the process to get there. A semi-inclusive or all-inclusive pricing structure is easier on your customer’s brain. In other words, a $100 tire +$5 +$5 + $5 + $5 + $5 totaling $125 is more painful than a $100 tire + $30, totaling $130. In this case, more money is actually perceived as less painful. Reducing pain increases sales.

I’m looking forward to our painstaking journey into the tire pricing process in the months ahead.    ■

Wayne Williams is president of ExSell Marketing Inc., a “counter intelligence” firm based in La Habra, Calif. He can be reached at exsellmkting@gmail.com.

For more articles from Wayne Williams, see:

Reeling in tire sales

The power of a simple sales demonstration

Selling to the millennial generation

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comments

  1. Barry | July 24, 2014 at 11:56AM
    This series will be incredibly important to independent tire dealers. In my experience, I have seen little or no science involved in the formation of retail tire and installation pricing by independent tire dealers. Most consistently believe that they are being undersold by their larger competitors, when they are not. Most will fight a wholesaler for $2 off a product, then use a flat mark-up and not put a dime of the savings (actually put less!) into their own pocket, passing this savings on to their customer who is unaware of the value or their effort because it was never communicated and generally not required. Many significantly underprice their OPP offerings, leaving valuable profit dollars on the table, when the market would allow for more. Many utilize a flat percentage mark-up that takes them out of the market when pricing high-cost specialty tires that could yeild substantial profit dollars at lower mark ups IF they closed the sale. Nearly all significantly undervalue their installation prices and neglect options such as road hazard coverage that add profit potential. Nearly all are lost when you talk mark up, gross profit %, price steps, and selling strategies based on purchasing programs. You've got a big job ahead of you- this is a series that I will be sharing with many customers!

  2. joe | July 31, 2014 at 10:24AM
    Wayne hit it on the head when said "Too much focus on gross profit dollars or percentages, and the units diminish; too much focus on moving units and margins diminish". The culture of sell tires at any price eats deep into the gross profit.It leaves salesman to sell tires with no accountability. A simple $3 increase or decrease in the price of a tire will affect the gross profit by as much as %25. Buy it for $1 less and sell it for $3 more and make %30 more money! Pricing as Wayne says is a key to an independant tire dealers success.

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