Following on from the article on loss leaders in the last edition of Professional Pest Manager magazine, Peter Cox explores pricing policy in more detail.
A good pricing policy is vital in any retail or service business. Formulating a price requires assessment of a number of factors: overheads, supplier costs, margin required, customer needs and the perceived value of the product or service. It is a balancing act for any business.
There are two types of products and services you regularly sell and both need to be priced accordingly.
Cash cow products
These products and services are the basic commodity lines. A tax return in an accountancy practice, tyres in a tyre dealership, paint in a hardware store, chemicals in a rural merchandise outlet, milk in a supermarket and general pest treatments in a pest control operation are all examples of commodity lines. A major motive in customers buying these basic commodities is price, and as such these products generally generate a lot of turnover but at a low margin. Prices are set by the marketplace and competition and are generally easy to be compared. Price is very much part of the consumer’s decision-making process.
Impulse or star lines
Unlike cash cow products, which are basic needs and are usually bought on price, impulse or star lines are purchased for other reasons. These lines are customers ‘wants’ and as such price is not that important. They are bought on impulse because the customer has seen them or has been prompted by the salesperson to purchase. Chocolate bars in a service station are a classic example, tape measures in a hardware store, and flowers in a supermarket and accessories for the new car. Star lines in pest control may include termite services, which are ‘needed’ to protect a customer’s home.
Prices for impulse or star lines are set with no correlation with the price purchased from the wholesaler or manufacturer and as such have a high gross profit margin. The prices are based on the notion of the benefit the consumer obtains. In the case of termite services, the larger the perceived benefit, which can be driven by the level or expertise and service offered, the greater the potential profit.
Price points
Consumers subconsciously set price points in their minds when obtaining products and services. The common price barriers for products in shops are 50c, $1.00, $1.50, $2, $3, $5, $7.50, $10, $15, $20 and multiples thereafter. For pest control services it probably starts at $100 and generally goes upwards in multiples of $50. If a customer sees a termite inspection priced at $199 it may be seen as a good deal, but at $210 it appears expensive. However, if a product is priced at $225, as it is now well past the $200 price barrier it can get compared to the next price barrier of $250 and so appears cheap in comparison. The bottom line is that you should never price just over a price barrier.
|
Major Price Barrier |
Price Point Should Be |
|
$100.00 |
$99 or $110.00 |
|
$150.00 |
$149 or $175.00 |
|
$200.00 |
$199 or $225.00 |
Try this test. Supermarkets are the experts in pricing – next time you go to a supermarket you will be staggered how many times the number nine appears after the decimal point.
Reality equals perception when it comes to pricing. Consumers have a pre-conceived idea of the price that a product becomes expensive and at what price it is a cheap product. Pricing your impulse and star lines with these perceptions in mind can dramatically increase the profits of your business.
I always use the rule that 80% of dollar sales (cash cow lines) cover the overheads with a residual amount of profit achieved, with 20% of dollar sales (star/impulse lines) generating 80% of the net profit. Pricing products and services is a crucial part of the process of good margin management.
