Do you remember the game show “The Price is Right”? Show participants were asked to guess the price of certain retail products. The closer they guessed to the actual sales price, the greater their chances to win prizes. Fun game to play and watch.
I like to simulate this game in the SBDC GrowSmart classes I facilitate when we talk about pricing. I will ask for a volunteer and then ask the following questions:
“Average price of gas?”… I will get answers from $2.00/gallon to $2.50. The average price is actually around $2.22.
“Average price of a gallon of milk?”… Answers will usually be anywhere from just under $3.00 to just over. The actual average price is $3.06.
“How about the average price of a loaf of white bread?”… My volunteer will usually suggest anywhere from just over a $1.00 to $1.50. The actual average price is $1.35.
So far, the guesses are pretty accurate. And why not? We buy these products regularly and the prices are published everywhere.
My final question is a bit tougher.
“Average price of hot sauce?”… At this point the look on the volunteer’s face goes from one of confidence to one of bewilderment. “Hot sauce?” they ask.
The answers usually come in as low as $2.00 and as high as $10.00. The fact is that nobody really knows how much to pay for hot sauce. In searching Google, there is no average price for this product.
Would you rather be selling milk or hot sauce?
What happens when the price of milk goes up? Demand goes down. Why? Because almost everyone knows the price of milk. Likewise, when the price goes down we all buy more.
What happens when the price of hot sauce goes up? My guess is nothing. Why? It’s because nobody knows the “right” price for this product and hence a price increase goes practically unnoticed.
Most small businesses sell their own equivalent of gas, milk, or bread. They sell products or services that most of their customers or prospects have some sense of what the market (average) price is. These are probably not pure commodity items but their demand is certainly sensitive to pricing changes. To the degree that many such businesses live in fear of either raising their prices or even a price decrease. They fear the immediate and sometimes panicked response of their existing customers and prospects.
Recently, my wife and I were shopping for a new leather recliner for our living room. It was time. The old chair was weathered and squeaked with every bodily movement.
My wife studied the newspapers for several weeks looking for sales and finally we found a great deal at a local national furniture outlet. She knew the prices for these chairs well and quickly recognized a heavily discounted (50%) sale. We drove to the store on a Monday and the chair was still there. Price as advertised. We felt great.
At check-out, the salesman asked if we wanted the product protection (insurance) on this new piece of furniture. He was well trained and offered us a multitude of reasons why we had to buy the extra insurance for a price of $79.00. While we could easily debate the merits of having the extra coverage on the product, we had no idea what the right price for this add-on was. We were clueless.
I opposed the extra purchase. My wife liked the idea. Guess who won…
The product protection we purchased that day was that furniture store’s own version of hot sauce.
My guess is that the store made a fair profit on the recliner. I am also confident that the store enjoyed a very healthy profit on the “hot sauce”. Almost 100% pure profit minus the sales commission.
What are you selling today that is your equivalent of hot sauce? The market is uncertain as to what to pay for it and it is highly profitable to your business.
The answer to this question may the key to you financial success in 2017 and beyond.