Every business that offers products and services to consumers must face a very important aspect of their business plan or model; “How do we price our products and services to be profitable, but also maintain customer loyalty?”
As you know, customer loyalty is greatly affected by how a business prices their products and services. The profits vs loyalty dilemma can be greatly impacted by competition and most of us averse to making pricing adjustments.
How does a business remove the hesitation they feel over price adjustments? The key component to overcome this averseness is to fully understand the competition and react accordingly.
Too often business owners assume they know their competition. They make pricing decisions based on gut feelings, or what they perceive to be true in their marketplace. Many just don’t do the research on their competitors, in part because they do not have the time to do so. Without data on the competitions’ prices, it makes it impossible to make pricing changes and causes businesses to be averse to pricing adjustments. Understanding the competitions’ product pricing allows businesses to optimize profitability and make these decisions much clearer, and frankly much easier. Like all businesses, banks and credit unions face this dilemma of pricing their products and services appropriately for their markets.
Michelin Star Chef Gordon Ramsay believes knowing your competition is key to success for any restaurant owner. One of his many television shows, “Kitchen Nightmares,” highlights this in many episodes. For those who may not be familiar with the show, in each episode Ramsay visits a failing restaurant and acts as a troubleshooter to help improve the establishment in just one week. He helps them to implement his recommendations, and then revisits the restaurant a few months later to see how their business has improved. Ramsey works with the owners to help them improve their restaurant’s products and service, and as a result of the improvements, increases their overall profitability.
One of Ramsey’s main focuses is to help the restaurant owners gain an understanding of their marketplace and competition, so they can make better business decisions. Many restaurant owners do not have a thorough understanding of their competition. They have no knowledge of restaurants in their vicinity or their types of cuisine. They have no information on their competitors’ menu items or their prices. Many of them have never visited the competitions’ restaurants.
Once Ramsey convinces them of the value of knowing their local competition, the owners visit their competitors’ restaurants, eat their cuisine, and see first-hand how the menu items’ prices compare to their own. For instance, the price of sushi at my restaurant is $5.95 and I now know the price of sushi at my competitors is $9.95 on average. My decision to increase the price of my sushi by $2.00 will improve my profitability, and will not negatively impact customer loyalty, as my price is still lower than my competition.
This information, along with Ramsey’s input, provides them with a better sense of how to price their food, adjust their menu, and in many cases, add items to their menu. He helps them to better serve their customers, which improves customer loyalty, and ultimately increases their profitability!
As we can see from Gordon Ramsey’s show, knowledge and facts are key ingredients when making pricing decisions. Fully understanding the competition takes the fear out of making pricing adjustments, and lends itself to maximizing profitability.
When bankers do not explore their competitive landscape, down to the smallest of details, it can lead to them being averse to fee adjustments. Taking the time to fully study your competition, and possibly leverage a non-bias third party for an outside perspective (like Gordon Ramsay in the restaurant industry), helps overcome fee aversion and leads to higher profit margins!