How To Lose Thousands of Dollars With Static Prices
“If you went up to that chalkboard with prices on it and changed one number today, you’d add $25,000 to your bottom line this year,” Scott Case told the café owners.
As the founding CTO of Priceline and co-founder of Upside Travel, Case knows a thing or two about pricing. Priceline’s key innovation was the Name Your Own Price® model that matched buyers and sellers in a new way. (The travel industry has long been innovative in the world of pricing, as we will continue to see.)
But for Case, one of the most interesting places to study the power of pricing is not in travel, but in small businesses. Why? Because so many small businesses rarely update their prices.
“You walk into a deli, and you just know that the pricing hasn’t been updated in a decade because the price board is printed in a way that it couldn’t be updated,” he told me.
And, as Case saw with one café, that can cost you tens of thousands of dollars a year in the sales of coffee alone.
Pricing is a Verb
The Digital Revolution has opened up new methods and models of pricing for every industry. We will examine these in the following chapters of this section. But the first step a modern business of any size needs to take is accepting that pricing is a verb, not a noun.
Too frequently, the price of a product or service is almost an afterthought for companies. If prices are updated at all, they are updated haphazardly without a clear strategy or analytical justification. While that may seem understandable for a small mom & pop business, in my consulting experience large corporations are just as guilty.
Price may seem a straightforward number, but for the most successful companies, it is anything but. The strategy that goes behind choosing different forms of pricing is intimately tied to how the company wants to position itself in relation to its competitors and its customers.
And the reality is that no company can afford to ignore its pricing strategy. There is no other lever that affects profitability as strongly as price. It pays to get it right, and getting it right requires continuous attention. Pricing is a verb.
Nothing in the modern economy can survive staying static. Critically, that includes pricing.
Case worked on a startup that helped small businesses in between his time at Priceline and Upside. That startup, Main Street Genome, was the reason Case was talking to a couple Washington, D.C. café owners about their pricing.
Case was helping with a simple competitive price analysis. Comparing this café just to those within easy walking distance, Case found it was substantially underpriced. And in D.C., there are plenty of cafés nearby that want the same customers.
“The café was pricing their most commonly purchased item — a regular coffee — 50 to 60 cents less than anyone else in the neighborhood,” Case told me.
The owners feared that raising price might cause them to lose customers. But Case calculated that simply raising its prices to the average for its surroundings would add a clean $25,000 a year to the café’s bottom line, and he doubted that the lower price was retaining enough customers to offset that.
As a small operation with only two owners, this represented a substantial chunk of change being left on the table. Making such price changes would be easy, too. The only technological change would involve erasing the numbers on a chalkboard and writing them again. There wasn’t even a point-of-sale system to update. Workers simply looked at the chalkboard to type in each item’s price during a sale.
Seems like an easy decision. Yet, the owners hesitated to act for six months.
Raising prices seemed aggressive. When they finally did act, they did at half of Case’s recommendation: instead of increasing by 60 cents to be just at the average of their nearby competition, they tacked on a mere 25 cents.
What the owners saw was what Case had predicted. They had no loss in volume. The café simply made more per cup sold. Those 25 cents were pure additional profit on every coffee sold.
In fact, in the first week after the price change, three customers thanked the café for raising its prices. These customers knew the café was underpriced and worried that it would go out of business. They were content, perhaps even happy, to pay more for a product that day than they had the previous week.
“Starbucks changes their pricing every 90 days at a minimum. If you’re a café and you’re competing with Starbucks, and they’re evaluating their pricing constantly, and they’re raising it three, four, six cents every quarter, that means they’re raising their prices about 20 cents a year,” Case explained.
“If you’re competing with them, and your prices are stuck for three years, all of a sudden you’re 60 cents a cup light. Which means you’re not harvesting 60 cents in profit to either make your business better, subsidize a strategy you want to change, whatever it is,” Case concluded. “You’re screwed.”
The New Invisible Hand
In this blog series, I share excerpts and stories from my book, The New Invisible Hand. I hope you enjoyed this post — if you enjoyed it and want to connect you can reach me here via firstname.lastname@example.org or connect with me on LinkedIn at https://linkedin.com/in/ktwestra/.
Also, you can also find my book on Amazon — here is the link to buy it: https://www.amazon.com/dp/B07VP1VQFC