Pricing Matters: The Smoking Gun
Saturday, December 10, 2016
I recently found myself stuck at an organized event, forced to endure the most heinous form of torture ever devised by man - forced small talk. Summoning my courage, I introduced myself to the first person I saw. He immediately began blathering about an uninteresting topic, and I began to formulate my escape plan. All of that changed when he mentioned something that made my ears perk up - he had just purchased a flamethrower (flamethrowers are apparently legal in some parts of the USA, but I digress).
As if the conversation couldn't get more unexpectedly interesting, he eventually mentioned an interesting tale of pricing gone right.
A gun shop owner he knew had been having a terrible time and his business was beginning to fail. It all looked dire until the owner came upon a masterful tactic that changed the course of his business. I found myself at full attention - and not just because I kept looking for my conversational companion to make any sudden movements toward a possible hidden weapon.
The gun shop was nestled in a relatively out-of-the-way area, and its selection was far from impressive. After all, one store's Smith and Wesson was pretty much the same as another's, and small shops can't possibly hope to match the selection of larger retailers. Each month, the man's sales barely covered his business' fixed costs, and the proprietor was ready to end his doomed experiment in entrepreneurship. Suddenly, he had a stroke of genius.
In the United States of America, buying a gun is more complicated than buying most other items. You can't exactly go to Amazon.com or BestBuy.com and have a pistol shipped to you. By law, weapons may only be sent to those possessing a federal firearms license. The licensee often tacks on a substantial fee for receiving the weapon and filling out the requisite paperwork for the end user.
That's where the owner's stroke of genius came in. Rather than implementing the usual high fee for receiving weapons shipments, he cut his transfer fees to almost nothing. As a result, his store rocketed to near instant celebrity status. Buyers began to arrive in droves. Shipments went from a handful a week to many each day.
But how did this help the business? What was the trick? Remember, even though the owner was receiving many shipments, he was earning next to nothing for each transfer.
The answer was suprisingly simple. When customers arrived in his store to pick up their weapons, he took the opportunity to show off his smithing skills, sell complementary goods (like bullets, holsters and aftermarket sights) and establish a reputation as a trustworthy shop owner. He wasn't just making money hand over fist from immediate upsells, but he was also paving the way toward repeat business.
He had effectively taken a commonly held assumption (that the road to profit is built upon adding hidden fees) and turned the idea upon its head.
As an added benefit, his business was able to reduce its inventory of low margin items (guns) and free up significant cash for more profitable purposes, such as expansion, marketing and increasing the selection of high margin items.
Of course, the owner's strategy is nothing new for the world of business. Many supermarkets famously treat a handful of select goods (like milk) as loss leaders and hope to make up for the loss in other ways.
Still, there are two important lessons to be learned: large hyper-focused price reductions can be more effective than middling across the board price cuts, and (more importantly) it's often in your interest to be polite to people who own flamethrowers.
Looking for some help with your pricing strategy? Why not contact me for a consultation?