How to Know When Your Prices Are Too Low
This industry is in full-blown transition mode. The talent, the landscape, even the customer base are changing. We are at a critical juncture where the industry needs to decide if it is going to devote time and effort toward the “do it for me at a fair price” customer or pander to the “do it for me at DIY prices” group.
Now is the time to prove to the customers you currently service that your place of business is the place of business. It’s time to separate yourself from the hanger-on customers (those who cost you money) and the base of loyal customers who pay your bills. If you are frustrated with your customer’s price focus or “always wanting a deal” type of mentality, I have some shocking news for you.
It’s because your prices are too low.
This magazine has seen me rail for higher labor rates and increasing prices on parts, all for a better margin. For being able to pay your employees a fair wage. To retain them in the coming wage war (which has really already started).
Here’s another reason to raise your prices to 2019 levels: to eliminate the price complainer. Let’s take a look at why that is.
It’s a sunny day in Rock Falls, Ill. You have been having a good year so far. Some ups, some downs, but overall, it’s not too bad. As you’re perusing the Yeti catalogue for some indispensable camping item you don’t really need, in walks a customer and starts talking to the sales advisor.
Five minutes later you hear the all too common refrain: “Can you do any better than that? The chain store down the street can do it for $50 less. How come you are so much higher?” And inevitably, in order to save the sale, keep the techs busy, or whatever other excuse people have to drop their pants on price, the deal is made.
There are two problems with this approach.
- The art of no negotiation. Let’s assume the sale was for $300, an average amount for a ticket. Generally, there’s only about 50% margin to start with on that sale. That’s $150 in gross profit, which doesn’t include expenses like utilities, wages, uniforms, advertising, and on and on. With the discount, we are now down to $100 in gross profit. We went from 50% margin to 33%, a 17-point difference!
All the expenses stay the same. The cost of goods certainly doesn’t drop. Know what else shrunk? Net profit. Net profit is the ability to reinvest in the company. Pay higher wages. Shine the shop. You know my rant by now.
When you state a price, if the customer asks if you can do better and you oblige, then what you’re really telling the customer is that your first price is always a lie, not a good thing for long-term customer loyalty.
- Margin as a measurement. Secondly, your price should reflect your confidence in your employees to do a better job than the competitor -- or not. The cost versus sale price margin is a measurement, not a business rule. If all of your sales are based on cost, then you will never get away from deal-seeking customers.
If your team is no different, no better than the competition, then you should be priced right along with their services. I don’t recommend this, because it’s a race to the bottom. Who can cut costs the fastest, who can pay the least in wages, who can get the cheapest import brake parts… the bottom is not a great place to be.
This path inevitably creates the “pain customer.” The pain customers seek out the best deal only. They have no loyalty to a brand or business. They don’t care about your need to make a profit. They only care about their wallet, and if their hard negotiations result in your bankruptcy, then who cares? They move on to the next place that will play.
Is your team better? More qualified? Can they do it faster without sacrificing quality by using good systems and working efficiency like a chess board? Then charge more. A good bit more. By being solidly more expensive than the competition and able to back it up, you won’t even be an option for the deal seeker. You’re starting from a point that’s out of their league.
By being above the competition in price, you are telling the market you are better, and by a definitive degree. You will attract the customer who rationalizes that a higher price means better quality, workmanship and parts. Now you have to back up that position.
For the common complainer (and I use that word on purpose; this is not just a customer who offhandedly asks if there’s a coupon out there), this is also why we quote whole jobs. “Two tires or more come with tire protection and an alignment.” If the customer balks, we have room to maneuver: “Well, I quoted you our premium package. We could remove the alignment if you’d like, but let me explain why I included it.” Or some variant of that. This way, you can move price around while still maintaining gross profit integrity of the items I am selling.
The future of selling in the tire and automotive industry is clear. In order to survive, your people need to exceed expectations and deliver a first-class experience. And as a business owner, you need to have your margins right, so you can attract the right talent and build your customer base with people who understand your strategy.
Dennis McCarron is a partner at Cardinal Brokers Inc., the leading brokers in the tire & automotive industry (www.cardinalbrokers.com). To contact McCarron, email him at denniscardinalbrokers.com. For more information on this topic, check out the expanded version of this story on www.moderntiredealer.com.