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Pricing for Short-Term Profits, Long Term Survival
When commercial landlords started complaining about a year ago that they were having trouble collecting rents, Peter Boritz got worried. He is president of Real Data Management, a midtown software firm that can help building owners manage their portfolios. The company’s health depends on customers who pay project-implementation fees of $25,000 to $50,000, plus $150 a month or more for maintenance contracts.
“You have to be flexible as they are going through tough times,” Mr. Boritz points out. “It’s part of the relationship.”
But he also had to keep the 40-employee firm profitable.
“We wanted to think long-term,” says Mr. Boritz. “The market goes up and down. Once you slash prices, how do you raise them later?”
RDM opted for a two-pronged approach. For a few loyal customers who mentioned that they were facing hard times, RDM temporarily lowered its fees by between 5% and 10%, making decisions on a case-by-case basis. To provide extra value to the other clients, the company began listing property owners’ vacancies in its newspaper and e-mail advertising, which saved the real estate firms money on marketing.
RDM, which remains “very profitable,” plans to open branches in six cities in 2009.
The changed economic climate and the sharp decline in fuel costs may warrant a new look at pricing strategies, say experts, but businesspeople should be cautious about lowering prices. "If you don’t charge prices now that allow you to bring in a fair profit, you will be in bad shape later," says Frank Luby, a partner in marketing consulting firm Simon-Kucher and Partners, which has an office in Manhattan.
Here is some advice on setting prices that allow you to turn a profit—and to communicate with customers about what you’re charging in ways that keep them coming back.
TIP 1 - Know the going rate
A surprising number of business owners come up with their prices without doing adequate research, says Nancy Spruiell, founder of Rego Park, Queens-based WholesaleProductRep.com, a marketing consulting firm. Survey current and potential clients on what they are willing to pay, she says. Also take note of your rivals’ price structures, to make sure your margins are competitive.“Wholesalers’ markups vary anywhere from 35% to 60%,” she says, adding that this figure can vary considerably by industry.
TIP 2 - Pay close attention to early sales
“I start worrying if my clients are not hitting sales goals in two to three months,” Ms. Spruiell says.If you’ve ruled out problems such as inadequate marketing or poor placement in stores, you may need to adjust your prices downward.
TIP 3 - Develop a profit range you can live with
Not sure how to factor in fluctuating costs for fuel or other supplies? Go with prices that will make sense and give you an acceptable profit range even if your expenses zigzag, says Mitch Tobol, president of The Tobol Group, an Amityville, L.I., marketing firm.“Your costs may change from day to day, but you can’t raise your prices from day to day," he says.
TIP 4 - Promote your company’s strong suits
Communicate clearly with clients about how you set your prices. If you charge a bit more because you contribute a percentage of profits to charity or use unusually high-quality ingredients, explain that in your marketing. “Right now, people want to spend their money on things that have a good reputation and that aren’t a gamble with their money,” Ms. Spruiell says.Small businesses can build customer loyalty by offering free educational resources, says Alan Siege, president of Small Business Management Consulting in Brooklyn.
When one client of Mr. Siege’s, Tarzian Hardware in Park Slope, tried to compete with the local Lowe's on prices for batteries and other basics, the move didn’t increase sales. After repricing the items at their usual levels, President John Ciferni began offering free in-store classes, including a course on weather-stripping. All six attendees returned to make purchases, which totaled about $250.
“The loyalty I got from those customers is the most important thing,” Mr. Ciferni says.
TIP 5 - Be direct about price increases
If you must raise prices significantly on a popular offering or a product line, send customers an e-mail explaining the reason at least two weeks ahead of time. Some clients may want to make large purchases before the increases.TIP 6 - Opt for small packages
If customers seem leery of signing long-term contracts or buying products in large quantities, sell your offerings in smaller increments at the same unit prices, advises Mr. Siege. “That way it doesn’t cost as much to try something,” he points out.RLP Capital Inc., a 13-employee wealth management firm in midtown, didn't want to lower its standard fees to stay ahead of an industry slump.
Instead, four months ago, it started offering new clients a one-time portfolio analysis for a flat fee of $500 to $1,000 says President Jeremy Paul. The firm makes this offer through lawyers and other professionals, to ensure that the deal attracts people who fit the firm’s customer profile.
“We are very selective,” he says.
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