It’s never just about price
The biggest thing about price is that price is not the biggest thing. Oh, don’t get me wrong, price is important, but it’s not the most important factor when customers are making their final decisions.
Study after study shows that value is number one on the customer’s mind. Every customer has a wide variety of concerns at the point of decision. It’s always price plus something; it’s never just price.
In my first article in this series on pricing in the July issue, I suggested that pricing is really a perception at a point in time. You can’t ever really know all the factors that are running through a customer’s mind, but you must keep in mind that price is only a slice of their perception.
For example, let’s say a customer needs four new tires, size 215/60R16. You tell the customer you have two different brands and both sets are the same price; four tires for $500. Of course, the customer doesn’t know which brand to buy. Then you tell him that one is an imported brand that he’s never heard of and the other set is a Michelin top-of-the-line product with an 85,000-mile warranty. One is certainly a better deal than the other.
Is $500 a lot of money, or not? It depends. If the customer only has $300 to spend, it’s a lot; if, however, he budgeted $750 for new tires, it’s a great deal. It’s a perception at a point and time, and my point is this, pricing is meaningless without context.
It’s the job of the sales staff to put everything into context: the customer’s needs, the best tire for the money, the profitability of the store, the availability of certain products, the age of the vehicle, driving habits, the customer’s budget, etc., etc., etc. Again, pricing is meaningless without context.
CUSTOMERS DON’T UNDERSTAND VALUE UNTIL YOU PUT IT INTO CONTEXT.
I hear many tire dealers complaining about pricing; they complain about the Internet; they complain about customers; they complain about the dealer down the street giving away tires. If a dealer is relying on price alone to drive sales, then it’s a vicious downward cycle. I call it the “knife fight”: it’s messy, it’s bloody, and everybody gets cut.
After reading my article last month, an industry veteran contacted me. As we discussed at length my article on pricing, he said to me, “I’ve always seen pricing like a football.” Let’s work with that. See the art in our digital version (page 103) by clicking here.
Opening price point
OPP is the Opening Price Point, and it’s a knife fight. In this first category, it is price, price and price with three types of customers: cheap, cheaper and more cheaper. In this segment, it’s best to use a straight dollar markup pricing strategy because percentages don’t work well on low-price tires. If you markup based on percentages on low-price tires, the return is too low. A 25% to 30% markup on a $45 tire is not enough gross profit. Of either markup method you might use, straight dollars is the best method.
The ‘sweet spot’
The second category is what I call the “sweet spot.” This category is where your pricing strategy has to be most effective. This is the make or break segment, where price plus strategy makes a difference, and where value-driven selling skills really come into play. For example, the zip codes that make up Santa Monica, Calif., have a very high concentration of BMW and Prius registrations. If tire dealers in the Santa Monica area are not prepared to sell to the BMW/Prius consumers, then they will lose both units and gross profit.
This is where the suggestions from the last two articles on pricing, such as “differentiation” and “anchor” pricing (see the July and August issues) come into play. You can use either of the most popular methods for marking up products, but the sweet spot category is best for using percentage markups. After you establish your markup percentage, you must do a sanity check. You had better know how your pricing compares on the top 20 most popular items/SKUs/tires in your immediate marketplace.
The ‘exotic portion’
Category three is the “exotic portion” of your tire sales mix. Not that these tires only fit on exotic cars, but they are items that carry a higher purchase price and more care when quoting. Applying a straight percentage markup can price you out of the market. The straight dollar markup strategy again makes the best sense.
Like I stated in an earlier article, with this segment, you should apply a strategy in advance in which you feel comfortable with your margins so you can move the units.
Lastly, gross profit dollars follow tire unit sales. The above-mentioned strategies are guidelines, and it’s important to remember that pricing is only important in the context of your market and your customer’s perceptions at the time of purchase. Always remember:
CUSTOMERS DON’T UNDERSTAND VALUE UNTIL YOU PUT IT INTO CONTEXT. ■
Wayne Williams is president of ExSell Marketing Inc., a “counter intelligence” firm based in La Habra, Calif. He can be reached at firstname.lastname@example.org.