Busting a myth!

Norm_Cabana · #1 06-18-2006, 03:29 AM

Since we now have a section just for business discussion and we now seem to be getting some activity on the forum I thought I would take a few moments and address a subject that is one of my hot buttons. In my business segment and I’m sure in other competitive business segments as well there are those who believe that they can come into an area and become successful by setting their prices lower than their competitors. The idea, of course, is one that is quite common, i.e. cut prices below the leader and make up the money lost on each sale by doing an increased volume of business. Why is this a popular idea? In my opinion, it’s popular because it is so easy to implement and on the surface sounds like a good idea. Who doesn’t like lower prices?

Just for grins I’m going to use a few easy numbers to see if I can dispel this belief, or bust a myth if you prefer. Assume for a moment that I am the established leader in my field. I sell my products for $100 each and I have the capacity to handle 60 sales an event. That means I have the potential to make $6,000 at every two day event. You now come along and set up your operation near mine and decide that you will set your price at $80 for the same item as mine. You’re under the common belief that by producing a product that is lower in price to mine, all of my customers will immediately leave me and go over to you and I will have to shut down my business and leave the field to you and your superior business methods. Dream on as it doesn’t work this way!

In the first place, no one gets 100% of the business at any event or in any business segment. The best business only gets a small fraction of the potential customers. Even when I am the exclusive provider of photos at an event I would be ecstatic if I could show my photos to 50% of the participants and sell to 33%. It’s more like I show to 30% and sell to 10-20%. At any given event there are customers who do not even look at their photos because, in their opinion, I am overpriced. There is also a segment of people who will not look at or buy photos no matter what the price. They just don’t want any. So, for the sake of brevity, let’s just say that I have 60 customers who buy from me and you have 60 or more customers that want to buy from you.

I make $6,000 from my 60 sales at $100 per sale. If you make the same number of sales as I do, you will only make $4,800. You’re going to make up the difference is increased volume, right? Ok, how many more sales do you have to make to make the same amount of money as I make? You’ve got to make $1,200 / 80 or 15 more sales just to be even. The first question that I would have is “Are there 75 customers out there for you to sell to?” Even if there are 75 customers, do you have the work capacity to serve those customers? Finally, do you really want to work 125% as hard as I do, just to make the same amount of money?

On the opposite side of this argument there is the belief that by raising prices one will lose business. The question is if I raise my prices how many customers can I lose and still keep the same or higher sales amount as I have now. Ok, for the sake of this discussion and to keep the numbers similar, let’s say I raise my prices by 20% and go from $100 to $120. If I continue to sell at my capacity of 60 sales I would make $7,200 per event but the question is how many customers can I lose and still keep the same sales amount. $6,000 / 120 equals 50 sales. I can afford to lose 16% of my customers and still maintain my sales amount.

There are more arguments to be made here. In the first argument, assuming that you find 75 customers, you’ll still not make as much money as I do. Since we’re producing the same products it can be assumed that the cost of the products produced are pretty much the same. Because you have to sell 25% more than I do the total costs for you to make as much money as I do is higher and therefore you will need to sell more to make the same amount. Now on the opposite side, if I indeed have to make 16% less sales to make the same amount as before, I can actually sell somewhat less than that and still break even as the total cost of the goods sold is less.

Does it still make sense to try to undercut the competition?

Gary_Evans · #2 06-18-2006, 10:03 AM

Superbly put Norm.

Plus, IMO there are other factors you didnt mention are such as - people tend to trust the established guys, people dont just buy on price - your of example two images on sale at $100 and $80. My experience is that people will buy the one they like - not the cheapest. It can be argued to that usually the established guy gets the better image because of their experience etc

Perhaps you should print your text off and send it to every camera shop who are selling kit marketed as "makes you a professional" [img]/ubbthreads/images/graemlins/grin.gif[/img]

Mike_Guilbault · #3 06-18-2006, 10:09 AM

[ QUOTE ]
On the opposite side of this argument there is the belief that by raising prices one will lose business. The question is if I raise my prices how many customers can I lose and still keep the same or higher sales amount as I have now. Ok, for the sake of this discussion and to keep the numbers similar, let’s say I raise my prices by 20% and go from $100 to $120. If I continue to sell at my capacity of 60 sales I would make $7,200 per event but the question is how many customers can I lose and still keep the same sales amount. $6,000 / 120 equals 50 sales. I can afford to lose 16% of my customers and still maintain my sales amount.

[/ QUOTE ]

Hmmm... I really like this model. I figure that if I raise my prices about 250%, I won't have to work at all!! [img]/ubbthreads/images/graemlins/grin.gif[/img]

But really... this is one of the things we learned in Marketing (201 I think). But some people are just not convinced and will do what 'feels' right to them, not basing their decision on any facts, figures or advice. That's why some of us succeed and other don't.

David_Buzzard · #4 06-18-2006, 05:19 PM

This is true of businesses that cater to higher end markets, but woe is the store front photographer who ends up with a Wal Mart down the street from him.

David Buzzard

BWBrock · #5 06-18-2006, 07:20 PM

It depends. If you are not selling to a volume that maximizes your overall net profit, you are wasting the use of your "investment" in time and equipment. It's one thing to do work for hire...people pay for quality results so the higher unit prices can be justified. But event photographers may do well to reduce their pricing if it increases volume enough to where it maximizes their net profit. Too many pros I know look at the unit-profit margin rather than maximizing their profit dollars at an event. Then they gripe that nobody appreciates quality work enough to spend $25-$40 per 8x10 for a photo of one of their family members competing. What is the spending threshold that would bump up sales to a volume that maximizes net profit? Play with the pricing and find out!

But, what do I know? I manufacture a commodity for my "day work" and do semi-pro photo work on the side (my hobby is partially self-supporting, in other words). Recently my manufacturing company was being hit with lower-priced competition causing a dramatic drop in sales. I lowered my prices to meet the competition and my production/sales volume went back up...as did the net profits! Photo work is seen as a commodity in the eyes of a significant percentage of consumers if not the majority of them. So, I see photo sales the same way. No matter how good your photography is, at an event people know what a print at Walgreens or Wal-Mart costs and they see any price over that as "your profit" from "easy work taking pics". That, or they just do not see value in spending more than $10-$15 for an 8x10 print. That's the "threshold" selling price in my area. Keep that in mind when setting prices.

To summarize, set prices that yield a sales volume which maximizes your net profit. Hint: it's NOT the maximum per-unit profit margin. Or, set prices so high that you can retire after one sale...just expect to wait a long time for that once-in-a-lifetime sucker, er, customer to buy from you.

Norm_Cabana · #6 06-18-2006, 07:55 PM

WalMart can be beaten. It's been done. As with anything that involves competition, if you play the leaders game you will lose. By that I mean, if you think that you can compete with WalMart, on price, with anything they sell you will lose. They own that game and they set the rules. They don't make their money by selling things cheaply, they make it buy squeezing every last penny of extra money out of their suppliers and then selling the product at a price point that ensures THEIR profitability. There is no way any of us could buy our products for the price that WalMart pays. Lots of businesses have gone under when WalMart came to town mostly because they didn't want to change.

However, you can compete with them on customer service, by the variety of your products, by the quality of your work, by adding extra value to your products, by being an expert in your field and finally by focusing on niches that WalMart either doesn't cover or does poorly in.

BWBrock · #7 06-18-2006, 08:07 PM

Agreed re: beating Wal-Mart. A storefront studio photographer can beat Wal-Mart with good marketing and superior service. The portrait photographer is not seen as a commodity (yet) and there are always upscale clients that would never set foot inside a Wal-Mart, walking past the restrooms, Customer Service Desk and auto battery return area to do their family portraits.