The 10% Pricing Trap - Powerful Business Strategies

0:04 Hi, you live Donto censure. Wow for you young. This is the pipe Man here on the Adventures Pipe Man W four c Y Radio. This is the positively pipemin segment with our powerful business strategies and we are back with our resident expert, Michael Barbarica from Next Step CFO, and we're going to talk today about the ten percent pricing trap. Uh oh, what's it? What's this trap all about? Michael trap? Well, well, first of all, thanks for having me, Dean.

0:47 And the ten percent uh pricing trap is when people drop their price ten So I had a client who was adamant about dropping their because unfortunately, they're not selling the transformation. They're selling the transaction. And that's the trap that all business owners get get into when you when you're selling your product or service, you're going to sell the transformation that takes place and the value that you add to that transformation, not the transaction. Get them off the transaction, get them into the transformation. And so he wasn't doing that, of course, and so he's just focused on price and price competition. So I told him, and this is what happens with most business owners, and it depends upon your gross profit moguic. But in this particular case, I said, if you're going to drop your price ten percent like you're proposing, it's going to require forty percent more volume.

1:47 Do you think you could do that? Oh? Definitely, Oh yeah, yeah, definitely. Well they couldn't do that, and so. The ten percent it going to require forty percent more volume in order to obtain the same gross profit dollars they were doing at the higher price. It So what happened, Well, they did more volume. It wasn't forty percent more, but they did more volume. So they had more customer complaints, more aggrevation, more work, more inefficiency, more you know, utilization of staff that was working at a lower price, and it didn't work at all. And that's the thing that business owners have to keep in mind, is that price increases.

2:33 If you have a ten percent price increase, you don't need ten percent more volume. You need in all likelihood, depending on the number, it's forty percent more volume. And when I say depending on the numbers, it depends upon your gross profit march. If you gross profit margin is higher, you don't have to make up as much volume if it's lower. Most business owners are in the forty to fifty percent range, and that's of gross profit. And so that's why I say, you know, your volume, it have to increase forty. I love what you're saying here too, because it's kind of a peeve of mine that people sit there and say, oh, I didn't have to take algebra, and I'm never gonna use algebra in my life, and that's why they don't recognize stuff like this. Or here's a funny you'll you'll recognize us from retail. When I was in retail, we used to have Memorial Day weekend sales. We'll use that since it was recently Memorial Day a couple weeks ago.

3:33 And. Basically we would have a sale that was fifty percent off plus ten and every single person thought. That meant sixty. But no, that's not what it means. You have to do the math. And so I relate that to this because so true people think, you know, doing a ten percent price co is not a big deal. But if you do the math, like you said, it's costing you for forty percent for that ten percent decrease, right, And no. One considers the cost of more customer complaints, more mistakes made in the field, more aggravation, more output means more people.

4:18 No one considers that part. I love that too, because I do consider that part. Okay, The fact is is that I'd rather have a few big clients than a bunch of little clients in certain respects. Other respects, not necessarily, but those respects you're talking about. It is true because here's the thing too. You do this ten percent price cut. This is what I've learned in business all my life is that those new customers you get that you didn't get before the price cut, they're the ones that are going to call you ten million times, email you ten million times, have ten million questions, and you know, basically they feel for that ten percent price cut that they should get forty percent worth of extra service.

5:14 Right. It's it's amazing, and that's and that's what that's what the ten percent price drap is because that you know, a business and even a five percent drop, you know you still have to make up more volume and you're still going to have that more activity, more aggravation, more people needed. It just a it's a it's a vicious circle. I strongly recommend no price no price drops. What do you recommend? I recommend price increases? There you go. You know, that's what I that's what I normally recommend it. It's hard for business owners to get their head around that, especially, you know, the situations where business owners have a real problem with it is they're trying to keep people busy, and so they'll drop what ever it takes just to keep them busy.

6:02 Usually that's not a good practice. Over time, you know, maybe you have to lay off, maybe you have to put people on temporary leave, you know, and how they're collect unemployment. There's strategies around that that I've used with clients. I call it retention bonuses, where if people come back after a leave, they get a bonus if they work there six months or more. So there's all types of different ways to skin the cat on that business owners go right for the drop of the price, and it's just not the right thing. Yeah, And you know, I gotta say that there's in like the restaurant or service industry, they do that quite often in certain areas like I'm from the Jersey Shore where basically after Memorial Day weekend to Labor Day weekend, it's like insanity and the rest of the year is a ghost down, and so many of the business is especially in the service industry, restaurants or things like that closed down during the off season instead of keeping the doors open to really get no business. Or there's other examples I've seen of restaurants that, you know, they find out that maybe lunchtime is not their good time, so they'll close down for several hours during that time. Because even the fact that you think about it, if you have a restaurant as an example, the cost of just

7:32 turning the lights on all that time absolutely could be significantly damaging to the business. Right. Oh. Absolutely. When I was in the ski business, we closed in the off season, totally closed shut them down, and it was just it was it was really effective because we specialized in skate. We didn't specialize in selling aqualungs or whatever the counter seasonal. Product would be. You know. So it definitely can pay off to do that, no question. So how do people reach out to you and get more information, find out more strategies that can benefit their business.

8:15 You're with your powerful business strategies. Well, they could do a couple of things, Dean. They go to my website nextstepsfo dot net in the right hand corner is at a link to a diagnostic the diagnostic takes three to five minutes. You just answer a few questions and uh it comes up with three business strategies that your competition isn't doing, along with the financial impact that those strategies would have if they were implemented, along with an explanation of the strategy and how to go about implementing it. That's totally free. You could also go to my uh you go to my website and hit the contact page, fill out the contact form and just put diagnostic and I'd send it to you immediately.

8:59 But it is right there on the site as well, so they could contact me in any of those ways. And once they do the diagnostic, that's a form of contacting me because I know that they did it. There you go. Well, once again, you're a wealth of information and this advice today should make people money for sure and save them money at the same time. Absolutely, thanks once again for giving us some powerful business strategies here on the Adventure of the Pipeman on W four CY Radio. Thanks for having me gate, Thank you for listening to the Adventures of Pipemin on W for CUI Radio.