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Time to put profit back in pricing?

With evidence mounting we’re finally climbing out of the pit, it’s time to put behind us the pressure to sell at any price for the sake of cash flow and start looking to profits. 

Let’s face it — we’ve been setting prices by what our competitors down the street have been doing and/or at levels depressed by liquidators or bank actions. In the struggle to survive, it’s likely some time since dealers have really looked at their complete business picture. It’s time to reverse that.

In her recent USA Today column “Know Value of Your Services Before Setting Prices,” Gladys Edmunds, founder of Edmunds Travel Consultants in Pittsburgh and author of “There’s No Business Like Your Own Business,” argues that how we price our products and services should communicate the value we offer our customers, as well as the vision we have set for the dealership. She uses her travel industry background to illustrate.

Following airline deregulation, People Express no-frills airline began flying. Their business model was: If the frills were removed from the cost of flying, travelers could save money. They priced a round-trip ticket at $49 from Pittsburgh to New York and $69 from Pittsburgh to Florida. “No frills” meant no pre-assigned seating, no advance reservations, no meal service, etc. It was an instant success with most flights sold out.

Edmunds pointed out that the prices did represent big savings. Other airlines were charging around $300 from Pittsburgh to New York and about $450 to Florida. Immediately these carriers dropped their prices to compete. But, they continued providing reservations, meals, etc. Although it’s hard to believe these “frills” cost in excess of $200-$300, there was no evidence that these carriers ever stopped to evaluate their actual cost of doing business – they just jumped into a price war! So, as People Express went bankrupt in less than eight years, grounded by heavy debt and other costs, the price war costs to the other carriers spun them into an extended downward spiral.

In the meantime, an airline surfaced called Southwest. They also had the “no frills” idea. They’re still around. The difference – Southwest is recognized for determining the real cost of doing business with the “frills” removed. The result is one of the best records of bottom line success in the industry, even in recessions.

Edmunds draws a similar lesson from the hotel industry. When you stay at the Four Seasons, the cost of all amenities is factored into your room cost, period! If you don’t need a pool, sauna, Wall Street Journal, gourmet restaurant, gym, fuzzy bathrobe and so on, a “no frills” priced Days Inn will serve just as well. Both price for the value received.

Two important considerations can be drawn from Edmunds’ article. First, as the economy improves, now is the time to reevaluate the true costs to do business going forward. For sure, they’re not the same as the “old” days. It’s good to be competitive, but it’s best to be profitable. You may even have to scale back some of your services (or raise prices) once you know what it really costs to do business in this new economic climate.

Second, it’s time to seriously reassess the wants and needs of your customers in terms of the products and all the services you offer. Do they now prefer “no frills” Days Inn products and services or do they want the full Four Seasons? Determining the desires of your customers will allow you to give them whatever they want at a price that clearly speaks of the value of the service, and is correctly priced to render a fair profit.

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