Is it Time to Rethink Your Pricing Strategy?

There are a variety of promotional strategies used by both service and parts but none more common than price promotions.  They’re as common as weeds in the garden.  So are on-the-spot discounts – especially on the service drive.  It’s neither right nor wrong to cut prices to make sales, but it may not always be necessary or wise.  Consider the financial results for your dealership and the psychological influence on both prospects and customers.

• Long-standing customers could interpret a non-promotional price-cut as proof that your prices have been too high all along.  It may encourage speculation that additional cuts are on the way and cause them to take a wait-and-see attitude – hold out long enough and get a better deal.
• Cutting prices during a sales process can imply that you can only compete based on price; that your parts and services can’t be sold any other way.  You then position yourself as something less than a provider of premium brand, high quality parts and customer services.
• Non-promotion price-cuts erode your company’s profit margin.  Because there’s always someone willing to “go one better,” it can also mean that you may need to cut prices again and again to stay in the game.  Better to decide first if you want in the game to begin with.
• Lowering your prices may be a good strategy but only once you consider the end result of your actions.  Everyone meets with price objections in one way or another.  When you do, you have several options: (1) Cut your prices; (2) Increase the perceived value of your products and service; (3) Make the offer at the requested price but for additional purchases or volume; or (4) give up the sale.  Price cutting is only one option.

When you cut your price you cut your gross profit margin.  This also has a dramatic influence on sales, gross, and net profit dollars.  When you’re thinking of lowering your prices, a good question to answer is: “How much more do I need to sell to keep gross profit dollars at the same level?”  For example, a 10 percent price-cut has to generate a 66.7 percent increase in sales just to keep gross profit dollars at the same level.

Here’s how the math works selling $20,000 a month in Widgets with a gross profit of $5,000 at a 25 percent margin (Proof: $5,000 / 0.25 = $20,000).  To continue making $5,000 in gross profit after a 10 percent reduction in price requires $33,334 dollars in sales (Proof: $5,000 / 0.15 = $33,334).  That’s an increase in sales of 66.7 percent (Proof: $33,334 – $20,000 = $13,334 / $20,000 = 0.667 or 66.7).

The greater perceived value your parts and services have, the fewer price objections you encounter. Research tells us the following about pricing.  Consider how they apply to your parts and service sales.

1. In the absence of all other information, prospects and customers feel that OEM brands are still the best indicator of quality.  Position your OEM parts and dealership services as true premium brands – not as “same as the other guy’s – just more expensive” brands.
2. Market leaders can charge more than less-well-thought-of competitors.  Your prices can be 9 to 12 percent above market average if your reputation for quality service and customers support earns it.  Make sure they do.
3. If you charge more, prospects and customers tend to perceive greater value.  If your prices are too low, prospects and customers tend to perceive there is something wrong with the product or service.  Most buyers do act on the belief that you get what you pay for.
4. Fewer than one in ten prospects and customers make their buying decisions based solely on price.  Trustworthiness, quality, reliability, and convenience come before price.
5. Some prospects and customers have compulsive personalities, and getting a bargain is more important to them than the purchase price.  A bargain is getting high value for a good price.  Start by make sure your products and services have high perceived value.
6. Some prospects and customers are situational price shoppers.  They may be temporarily dealing with limited funds or available credit.  Wisely working to help these buyers through their temporary situation tend to produce some of the most loyal customers you’ll ever have.

Finally, we’ve all learned that it’s harder to raise prices than it is to lower them.  Think before you lower yours.  You do have other options.