In today's weak economic conditions, nothing can be more important for any business than to have the "RIGHT SELLING PRICE! This mystical number for a product or service can make or break a company. In this week's lesson we will discuss this mystical topic.
Think back to the late 1990's and the tech stock mania. Many internet companies had business plans to sell their products to consumers at cost or below. They didn't plan on making a dime in profit from merchandise sales. Their theory was that if they could draw enough people to their web site (eyeballs), they will be able to convince advertisers to pay a premium to for a banner ad on their site. Their plan was to grow traffic to their site with the hope of creating a valuable asset for a larger company to gobble them up at a hefty return on their time and resources.
Some businesses actually made this happen. Mark Cuban was one benefactor of this theory. He became a billionaire by suckering Yahoo to buy his internet business named broadcast.com for billions in Yahoo stock; which he in turn immediately sold before the Yahoo stock price cratered.
Many other retail businesses of the 90's that used to be called catalog companies became internet retail pioneers. They sold products cheaper than big box stores and at the time did not charge sales tax. Keep in mind that these companies had the benefit of not operating expensive retail buildings or employing thousands of individuals on their payroll. They only employed a few people and provided LITTLE or NO SERVICE. Their website would only be hot until someone else offered the same exact item for 5% less. Then, customers who were buying for price only, would probably drift away. Building your business around cheap pricing rarely works for the long term.
Thus in the case of the tech bubble that burst in the early part of this century, everyone knows what happened. Most of the participants disappeared forever. They just couldn't turn a profit! One thing that must always be remembered is that IN THE LONG-RUN, economic law wins out. Games can be played that run contrary with economic laws. The games can last for years and even decades, but in the long-run, economic law re-establishes itself and the truth is revealed.
In the case of the stock market boom, the truth was revealed rather quickly. Warren Buffett said something that is very relevant to this topic. He said, "It's only when the tide goes out that you learn who's been swimming naked." Even though many of those tech companies were valued at billions of dollars, economic law brought valuations back to reality.
How do you spot when economic laws are being toyed with? There are many catch words to look out for, and here are a few. First you will hear calls that we are in a "new economy." Then phrases like "the old laws of economics don't apply anymore," or "technology has changed everything." The bottom line is that a company will either be profitable or it will not.
Let's say that you want to start your own business. Regardless of what business you are in, I believe you MUST BUILD VALUE into your pricing structure for your products and services. Your FIRST GOAL should be to satisfy the needs of your customers. Your pricing strategy must be well planned. You need to EARN ENOUGH PROFIT to cover expenses, compensate yourself, your employees and have excess profits earmarked for future growth initiatives.
In the end, it is consumers and clients who set the prices based on how much they demand your product or service. Contrary to popular belief, it is NOT suppliers and businessmen who are in the driver's seat. It is the consumers and clients who have the ultimate economic power. Their power lies in their ability is to choose someone else to do business with. That's right! Businessmen and suppliers can pick whatever prices they wish. A gas station owner can put a sign up that says $10 per gallon. In fact, he can put one up that says $10,000 per gallon. It is his right to do so. The gas is, after all, his property. He owns it. But it is the consumer that holds the cards. The consumer can REFUSE to exchange his money for that gasoline.
If you are in business, you never want to wake up one day and be like the BIG THREE car makers who can't figure out why no one is buying their products. You have to wonder why they weren't listening to their customers and making the necessary changes over the last few decades. Make sure that you are listening, because your customers hold the trump card: Their right to refuse to do business with you regardless of your price is a powerful and deadly weapon.