Saturday, February 5, 2011

Competing With No-Overhead Operators

These days, deciding how to price your product can be especially difficult. Many brick-and-mortar retailers find themselves competing against online shops that have very little overhead. Some of these online companies don't take title to the merchandise they sell, and few provide for returns in the case of defects or mistakes. Other companies, such as well-run, sophisticated garages, are forced to compete with shade-tree mechanics who have never even talked with an insurance agent, much less bought a policy. Unfortunately, there are some customers who are going to do business with those folks because price is what drives their decision-making, whether by choice or necessity. But you can’t let those customers set your prices because you’ll never be able to compete—price-wise—with the no-overhead operators.

Your answer has to be providing value to your customers that justifies the higher prices you charge. You provide value by standing behind the merchandise you sell with reasonable return policies, providing side-by-side hands-on comparisons of optional equipment, and helping the customer make intelligent choices with face-to-face advice from knowledgeable personnel. These are all things the online drop-shipper has trouble doing. These may be intangibles that are difficult to quantify, but they add value to the customer’s transaction with your business, making higher prices easier for them to swallow.

This same value-plus strategy holds when you’re competing with a large chain store. They can’t match the personal service and relationship with each individual customer provided by a small shop owner. Their volume purchasing may enable them to offer lower prices, but they’ll never know every customer by name and every customer’s favorite flavor of ice cream.
Competitive labor rates are tricky. Again, you’re probably wise to not compete on price with the weekend handyman or shade tree mechanic. Instead, count on the value you deliver to justify a higher price. Your installers and technicians are fairly paid and receive at least some benefits, so they’ll be around when the customer comes back. If they’ve moved on, you’ll have hired someone else to take their place. You’ll also have trained those staff members and added your own expertise to help them over the rough spots. Your customer should have a sense that his job is being handled by a team or professionals, which makes it worth a higher price.

With all these factors to consider, setting prices is part art and part science with maybe a little management magic thrown in for good measure. To create a profit for your shop’s pricing structure, take one part cost of goods sold, add a portion of labor, two scoops of overhead and a dose of competition, then stir rapidly with a sharp pencil.

Dave Donelson distills the experiences of hundreds of entrepreneurs into practical advice for small business owners and managers in the Dynamic Manager's Guides, a series of how-to books about marketing and advertising, sales techniques, hiring, firing, and motivating personnel, financial management, and business strategy.

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