I recently had my oil changed on my Porsche. The total for an oil change is around $120. The typical cost of an oil change if $19.99 (plus tax!) for your average car. Now, let me explain why I would rather pay $120 for an oil change than $19.99 (and the answer is not because I want to drive a nice car – so read on).
Owning a company that operates in a number of market places targeting different demographics has made me realize one of the important factors in market research and pricing analysis – know your customer. This is often overlooked by companies, which can lead to profit dollars being left on the table (or not selling as much as you could, if you out price yourself in the market!). To give a more specific example, lets look at a product such as a radiator. There are a number of variables which affect cost of a radiator, but it really comes down to material cost, which in turn relates to size. When we first moved into the truck market, our first step was to analyze the consumer and what they considered to be ‘normal’ in terms of maintaining/replacing a radiator. We called around to different dealerships and collected different data points for replacement costs of radiators. We then researched on the forums to see what people were saying about the costs. It was considered ‘normal’ that a replacement radiator was roughly $450. Now, when looking at the other replacement products on the market, they were selling a comparable replacement product for roughly $200. The reason they were priced so low is that the replacement companies have priced their product based on a cost plus model. It cost them $100 to make it, so lets sell it for $200. By understanding what the consumer is willing to pay, you can maximize your potential profit dollars. When we entered the market, our goal was to be priced slightly under (say 10%) from the dealership price, yet offer a stronger warranty on the product. We’ve now created more value for a lesser price than the dealer. When a consumer is looking at the dealer product, our product and the replacement brand product priced at $200, there is going to be a perceived value that the $200 is junk – because it is priced substantially lower than what is considered ‘normal’.
A consumer is always going to revert to the age old saying, “if it looks too good to be true, it probably is”. The takeaway point of this is to take the time to understand your consumer. Figure out what they want and what they are willing to pay. My $120 oil change came complete with a pick up and drop off service. This was a substantial value add to me. If my oil change were $60, but I had to drive there, fill out paperwork and wait – would I? Or would I go down the street where they were offering the same service for $20? Know your consumer, know what they want and more importantly know what they don’t want. Attach a value to what they do want and price according to that. Don’t price solely based on where other companies are pricing or based on your cost. If the consumer is willing to pay it, why give it away for free?
-Mike