Bad Services and Bad Pricing
When I did my Business Degree we studied economics. In those lectures and tutorials there were Supply and Demand curves, Price Sensitivity, and more. Economics is a very valid way to look at pricing, and for some clients I will actually do a Price Sensitivity analysis. But to do this here … I’m thinking I will almost certainly lose everyone that is reading this article. With all respect – watching paint dry may be more entertaining than reading about dry economics.
This is a complex topic and to get it all down in one blog is impossible. So, let’s look at some everyday examples to see if we can use them in our businesses.
Let’s get into it …
Bad Services
Is there a business you can actually have bad service in, and still survive? Yes, I have to say there are – but I think these businesses pay a high price in doing this.
There is one business that I drive past regularly … and that’s a tell-tale sign right there. The business is a petrol station, and it has very low fuel prices. Fuel prices – like everything else these days – are very high. This business sells petrol at low prices, however the service at the counter is bad – really bad.
I’m sure we can all understand when petrol prices are low, we will pull the car in and fuel up – good or bad service doesn’t count. But not so fast …. at this petrol station you’ll find there’s an alternative petrol station just across the road. And this one across the road has fuel prices only a few cents more, it’s also clean, there’s not a long wait time, and the counter service is friendly, welcoming, and mannered. That gets my business every week. At the very most I may be paying about $1.00-$1.50 to fill my car. The extra good service I receive is far greater than the small saving I miss out on. And when comparing the traffic in these two businesses, the one I go to gets significantly more customers.
Agreed, it's only one example, but I think quite a powerful one. Petrol prices are powerful draw cards which we all take notice of – we’re looking for the cheapest we can get. Prices are through the roof on everything, and here is one way of making a saving on our weekly budgets. But even though the price is so very powerful, the bad petrol station is taking a substantial loss in business, and of course, in profit.
In almost every petrol station we go to there is also the inside business of selling milk, drinks, food, bread etc. In the one I go to you can see this side of the business doing really well. In comparison, the bad service station has a very small number of inside products – the consequences of this are both obvious and substantial. What if they, the bad station, upped their game and gave great prices, and great service. The answer is fairly apparent.
I wasn’t going to talk about economics, but notice that the petrol station across the road would have had to compete, and therefore reduced their fuel prices – it was a matter of economics. And here’s a thought, I wonder if the lure of low fuel prices in the area bought in lots of customers to the business with the great service … yet the decrease in their fuel prices was significantly recovered by an increase in the instore trade. Sorry, more economics … I’ll move on …
Bad Pricing
Let’s continue with some examples -
How do you price your services and products. It can’t be that hard, can it? Actually, I’d say it’s one of the most underrated tasks that business owners do. It really does need some serious thinking about.
Is it a good idea to just use a markup percentage? May be – what’s your industry doing, and what’s your competitors doing? If the industry and your competitors are doing all the same, then great, the decision is made - just follow them. But that doesn’t even sound right. So ok, if they are all doing the same, then if I don’t do the same and I significantly reduce my prices, I’ll sell way more than my competitors and I should make some good profit – low and marginal profit, but volume will make up the difference …. right? Let’s also make pricing some items low (lose leaders) so that customers start to come in to buy, and then they will also buy the other items that are not discounted.
This is getting complex – we have Volume, Pricing, Demand, Supply. Oops, a little bit more economics just slipped through. Let’s keep moving - here are 2 examples I think show some really good insight on pricing …
I watched a guy in an independent grocery store smash the competition in and around his shop by using lose leaders – he was so incredibly good at it. And he got the superior profits to match. It was just incredible to watch him over 3 years mange this so incredibly well. He’d bought the shop at a reasonable price, but about 3 years later sold it for an exceptionally good price. And let’s not forget, during that time he ran the business he also made some great profit too.
But, contrast this to the following …
I use to go to an independent grocery store near me (not the one above). I would do quite a bit of grocery shopping here. It’s very close to me, there’s parking, super nice people ran it, and it was very convenient. The only downside was the prices were on the high side. But I thought for the ease of shopping, and the service, it was still a good deal. Unfortunately for me the owners recently sold the shop. And the new owners have increased their prices – and even by today’s standards – the prices are now seriously on the high side. You can see the decline in business that is happening ... the prices have just gone too far. A recent discussion with some neighbours confirms their thinking is the same as mine. Regrettably, I am now in the big food chain stores, fighting for parking, trolleys, crowds, long ques and more … but the prices, although high, are so much better. Again, it’s a matter of that thing called economics …
There is no quick answer to pricing. It needs a great deal of care and attention. Knowledge about your industry, competitors, the economy, product verses services, and especially about your customers – they are all absolutely essential. And, the market will always adjust to get equilibrium. And there’s another bit of economics that just slipped in …
On a note before I close out pricing: Price Increases are often talked about as a means to increasing profits. I have on my webpage a “Success Story” that has this as an example. Price Increases definitely work, but please be very carefully when looking at this as a strategy. There is such a lot to look at and understand. If you are unsure, have some doubts, I would strongly urge you to get help before you proceed.
In Closing
Ok, I admit it. I tried to sprinkle some economics through this blog without weighing it down too much. I was, hopefully, trying to show that everyday businesses are a great source to learn pricing and services in a real-world environment.
I think there is some great potential when you have great Services and the Pricing in your business. Do this and you will make for yourself a really great business. Also, I wrote another blog which you might like, and it fits in with this one really well. See “Three Common Business Mistakes”.
And as always, give me a call and we can talk about you and your business …
