Should I Charge Less or Advertise More?By JAY GOLTZ
Many businesses these days are trying to figure out how to increase sales. Money is tight, and customers are holding on to their dollars more than ever. I just had an interesting meeting with my managers as we plan for next year.
We were discussing the picture-framing business. The entire industry is off, in part because in a rough economy buying a picture frame is not even as critical as, say, buying a sofa. Its also true that picture-framing is considered expensive. We buy direct, do everything in-house, and run a pretty lean operation so our prices are competitive. But pricing is about perception, and some customers have told us that our frames are not cheap. One of the managers wanted to know if we could do something about that.
This conversation led us into what turned out to be a useful exercise, one I think could help a lot of businesses. We started with the following question: Imagine 100 customers who live within our trading area who are going to have some framing done but dont come to us. What are the possible reasons? After we came up with four, we assigned percentages of probability to each one. That in itself was interesting hearing the opinions of six different people. This process is not scientific. It was meant to be more qualitative than quantitative. In any case, heres what we came up with. Of the customers in our trading area who went somewhere else, we estimate that:
- 5 percent used us and for some reason decided they didnt want to come back (we have a very high repeat and referral rate).
- 25 percent are loyal to another frame shop and have no reason to leave.
- 20 percent consider us too expensive.
- 50 percent dont know about us.
The conclusion? Well, lets look at the four groups and think about what opportunities we have and which would be the most cost effective. The first group is only 5 percent and very hard to identify. Just because someone hasnt been in for a while doesnt mean he or she is unhappy; people go years between framing jobs.
The customers who are loyal to and happy with another shop are pretty tough to attract, but you might be able to give them a reason to come in through advertising.
Then there are the people who think we are too expensive. Well, I could drop prices by, say, 5 percent. Lets say that drives 10 percent more business. That sounds pretty good. But in my business, with my margins, this would actually hurt profitability because although I will be framing more pictures, the incremental cost of the additional work will exceed the additional revenue. The lower your margins, the more dangerous it is to lower your prices.
Once wed done the math, it became obvious that it made the most sense to go after those 50 percent of the framing customers who had never heard of us. We decided that spending 1 percent more for advertising including traditional media, social media (its not free; you have to pay someone to do it), and Google AdWords was a better use of our money than cutting prices. Thats because the 50 percent group that has never heard of us is a much bigger target than the other groups and because advertising would also give us a shot at the people who know about us but are going elsewhere and the people who have not been happy with us.
While its possible that we wont generate enough business in year one to cover the increased advertising costs, the expenditure is more of an investment. Im confident we will eventually make it back in repeat and referral business. At least that is my theory. My outside accountants werent convinced because I couldnt prove it beyond a shadow of a doubt. Thats why theyre accountants. Thats their job.
Every company is different, and every companys position in the marketplace is different. The bottom line is that playing around with pricing is not always the most effective way to increase the bottom line, even though it may seem the easiest. Youve got to do the math. Making yourself busier doesnt necessarily make you more money.