Worth Every Penny: Pricing & Discounts

[Pesso]

Hey Square Readers,

We’re just about halfway through reading Worth Every Penny by Sarah Petty and Erin Verbeck, and so far we’ve talked about the basics of the Boutique framework, the benefits of branding, and providing incredible offerings and customer experience. 

Now, let’s dive into section 3 of the book: Pricing.

Price Right

“People are willing to pay more when the product or service they receive is worth more.”

Pricing your offerings the right way is key to being Worth Every Penny. It’s where all of the work you’ve done so far pays off. Literally.

The authors write, “Determining the price of your offerings can seem frightening. You might be thinking that you don’t want to undercut yourself, or maybe you’re afraid of overpricing to the point where you won’t get many customers. So where do you start?”

They recommend not just guessing, or leaving it up to the customer, or negotiating. Don’t just base your prices on what others are charging because you don’t know their businesses, and there’s going to be a huge range. Instead, your prices should reflect your expenses, but with an added healthy margin of profit to take into account the added value and quality of your services. Once you start creating demand for your offerings (detailed in Chapter 11 of the book), you can then take that into account and continuously adapt your pricing to charge even more, which customers won’t mind. 

They say that competing based on price is a surefire way to go out of business. You’ll never be able to keep up with big name discount chains who will be known for having the lowest prices, so it’s up to you to set your business based on the value you can add rather than the price you can beat. Rather than lowering your prices, instead increase the value of the offerings to make the experience worth the price you need to charge.

The Real Cost of Discounts

“With any sale, a boutique business owner risks devaluing his brand… And the scars of a sale can run much deeper. 

Discounting your offerings may sound compelling to increase your sales, but being busy does not equal being profitable. Selling more at the cost of losing money is not the goal. Running discounts can hurt your business in a few different ways. 

If you discount once, your customers will expect you to keep discounting. This applies to your new customers, but even to your existing loyal customers that you’ve spent time and money building up a brand and reputation. But if you never discount, customers know that and will buy from you at any time. 

The authors write, “A drop in price teaches the best customers to wait for a sale or consider other, cheaper offerings… Everyone wants a great price. But certain people shop specifically for the lowest price. They are less loyal. They don’t care about the quality of what they are buying because nothing is more important to them than the price. You can’t build the business you want with these clients…” 

Even more, you end up devaluing your offerings and your brand by lowering the price. It changes the customer perception of you and your business to that of a discount brand. To the customer, the offerings and your service now only have the value of the price they paid. 

However, the authors say, “discounting can make sense in certain scenarios…” Some of those cases where discounting is valid and doesn’t devalue include: fleeting time-sensitive or closeout seasonal inventory, bundling or prepaying, services from employees in training, sampling, and partnerships with other businesses as referral leads. And of course, communicate those reasons to your customers so they know.

So they recommend adding value instead of discounting. You can do this by offering things like a free gift with purchase, or a loyalty program rewarding repeat visits. The difference here is that they are spending the full amount and are getting treated by you to a bonus. They’re seeing the value of buying from you, and you’re maintaining your profit and reputation.

In our next discussion thread, we’ll talk about Section 4: Marketing and Sales.

We’d love to hear your answer in the comments:

• Do you discount your prices? Why and what effect does it have? 
• How do you set your prices now? What is your current markup or profit margin? Can you safely increase it? 
• What makes your prices worth it? What can you do to increase the value of your offerings? 

Feel free to share any other thoughts you have about this book. We can’t wait to hear your thoughts in the comments below!

Don’t forget to:

• View and Subscribe to all threads about this book
• RSVP to our Live Discussion 

Happy reading,

Pesso

[Bronze_Palms]

Love this discussion topic. Before we set discounts, its super important to get clear on your TRUE profit margin - not just the cost of goods sold but EVERYTHING (website, rent, utilities, payroll, etc). That sets the foundation for where you can discount at.

[Pesso]

Yes! Such a great point, @Bronze_Palms ! It's so important to know where you stand and make sure that your prices are set at the right place to make a profit and stay in business. 

What steps did you go through to figure that out and set your prices?

Do you do any discounting?

[Bronze_Palms]

I agree!

I log all of my expenses then figured out how much revenue we were earning.

We have multiple steams of revenue so that meant getting all of our money in one view. That is where we automated Square and set up multiple locations to track our money. Then, on desktop, we were able to see all the locations roll up into one comprehensive view. 

As far as expenses are concerned, I have multiple credit cards for each business type. One for our wholesale line, the first salon, and the second salon. This way, the supplies and goods expensed on each card are being paid by the same location; instead of salon 1 paying for salon 2's expenses paying for wholesale's expenses.

This allowed me to get really clear on where our money was sitting and which business had the best profit margins. The higher the profit margins, the more discounting that can be done.

[CareyJo]

That's fantastic!  I know so many business owners who don't keep their finances separate or co-mingle accounts.  Great job!

[Pesso]

Oooh, nice @Bronze_Palms !

Tracking is absolutely huge, and splitting up by location is a great easy way to calculate your expenses for each. I really like the idea of having separate credit cards for that! 

The book talks a lot about recommending no discounts. Did that advice resonate with you? Will you still discount after reading those parts? 

[Bronze_Palms]

Thank you yes! I also leverage debt. For example, Salon 2 is opening in July, meaning we will not be earning revenue on the location until July which means I should not be taking on expenses until then or else Salon 1 or Wholesale pays for Salon 2. To avoid this, I applied for an 18 month interest free credit card (a loan basically) and expense all equipment on that card, paying the minimums every month, so I can start really paying that off when we start earning from that location in a few months.

As far as discounts are concerned, I think that is very personal for each business and not something I aligned with on the book. I own tanning salons and discounts are a great way to reward clients who love tanning with us. If we discount their next service in the next 30 days at 25% off, they are really only saving 12.5% on each transaction - I can afford that. They feel appreciated, they come back more so more $$ earned instead of coming back once every 6 months, they are back every 30 days, and they are walking billboards for the business so the referrals are endless on it. I do agree that we should not be discounting services for their first time. An average client tans with us 2x per year - my goal is to increase that to 4x. The discount has encouraged that.

[Pesso]

Ah that sounds like a solid plan, and I'm hoping it all works accordingly, @Bronze_Palms ! 

Thanks for bringing up that very good point -- we love a diverging opinion! I really like how you're using discounts more for loyalty and rewards, and making sure that the math and numbers work for your business first, and that you can afford it. It definitely sounds like it's well tested and thought through, and paying off for referrals. Love to hear the successes!

Thanks again for sharing-

[CareyJo]

I also questioned that about the book - I wasn't sure that I agreed with that 100%.  I think it depends on all of your business's demographics - what your location is, your clientele, the type of business you have, the volume you do.  I do agree that discounts should be more reward based to create loyal customers.  But I don't think it's a be all-end all kind of situation.

[CareyJo]

No, we do not discount.  We have however, on a number of different occasions for special promotions to new clients only, run an offer for a one hour inspection/cleaning at $65.00 when our rate was $80.00 per hour.  Since we've increased our rate to $100.00 per hour, we've only done this a couple of times for special events like a vendor show and we've done it at $85.00.  It's only a loss of $15.00 per client but it gets our foot in the door and as we all know, word of mouth is the best form of flattery.  The only time we actually advertised this offer publicly was when we first opened 7 years ago, at the beginning of the spring and falls seasons.  It was on posters that I hung around town, not even in the paper.  The last time I ran this special was for Halloween.

Every year that we've been in business, we have done something different to give back to our local community.  That means the town we live in only, which is Boulder.  So this doesn't go out to the masses in the other major towns around us, within 30 miles.  It's more selective to be specifically where we live.  Our first year we did a big BBQ in the park and literally just fed people.  We've had a movie night in the park and gave away popcorn and treats.  We've done a kid's car show, had a lunch for all branches of law enforcement in our area and given away coffee from the local coffee shop.  For Halloween in 2023, I made 300 goodie bags for families.  In each bag was a larger bag for the parents with a newsletter, business cards, a coupon, etc. and the smaller bag for the kids had candy and Halloween toys for the kids.  These were given away at the grocery store, the library and the post office.  Three places that every family in Boulder visits daily.  I used that special to create a gift certificate 'coupon' if you will, that had specific parameters on it that could be redeemed for new customers.  We only had one of them get redeemed... BUT that service call was for 4 houses on their property AND a replacement furnace.  I'd say it paid for that entire marketing campaign.  Especially since that client is part of a very large family in the Boulder valley and is 7 generations strong, on that land.  There will be more business that comes from that family.

Our prices have always been set on two things - since we're a service company, the hourly rate is based on the value of our time and the average market rate.  The other is our markup and that is 50% on parts and equipment.  You might think that's a lot but there are a lot of companies who don't do flat rate.  They markup equipment at let's say 100%, then markup parts under $500 by 200% and then have even more brackets.  It's crazy.  They also charge time + mileage on travel and they charge different mileage for different areas of the state.  Not only is all of that difficult to keep track of but it's unfair to most clients.  We do a flat rate for all markup and flat time without mileage for this reason.  So, based on what other companies do, 50% is reasonably fair.  We make good money on that, we don't need to increase it.  It's been the same for 7 years since we opened.  The higher prices go on equipment, the more we make, so no need to change it.

Our education and experiences make our prices worth it.  You cannot find a better diagnostician in our area.  You also cannot find greater than 5% across the state with the education and experience we have.  These are things that are not known publicly but once we get a new client and they learn this, then word of mouth takes over.  That's why we don't have to advertise.  We recently forwarded my husband's personal cell phone to our business line because 'friends' keep giving out his number instead of our company information.  Our/his time is not respected and everyone thinks "I know this guy, I don't have to call his office."  So he no longer answers his phone, it all comes to me.  We have literally been around town and seen someone that we haven't seen in a long time and they say "you changed your phone number, I need it" and we literally tell them no.  We have hundreds of people, not even joking, who call him for service, because he is so well known.  People tell me when they call "I've heard you guys are the best", so that is why our prices are the way they are.

I've actually been working on my homework from the chapters and trying to figure out what we can do to up the ante.  I've come up with several ideas and I won't list them all here, but I will say that one of them is to send out a handwritten thank you card for the first anniversary of the installation and offer to do a check up for free.  We do a ton of installations that don't come back for annual services because they most often think that it's running so it doesn't have to be checked.  I'm thinking if we start offering that first anniversary service for free and express to them how important that annual service is, we'll get more annual appointments coming in and they'll tell their friends about it.

Looking forward to the final section review and discussion.  I hope the next book is this enjoyable!!

[Pesso]

Thanks for sharing so much, @CareyJo !

That sounds like a really good way to do it -- discounting as a special offer to specific groups at events can be a way to appeal to those groups. 

I absolutely love how focused y'all are on giving back to the community! It's such a good way to build a reputation and goodwill with folks. 

Your price structure is really solid! I love how clear and transparent it is, and leaves plenty of room for profit for you, and is scalable no matter what happens. 

Such a good call on finding ways to split out and balance personal and work life. That's great that you're getting so much word of mouth referrals, but so hard when it doesn't respect your processes -- so that's a great way to cover and fix that. 

I love the anniversary note idea, and offering a checkup! Definitely a great way to hopefully convert to paid maintenance and bring back some lapsed customers! I'd love to hear some more of your ideas if you're up to share them -- they could absolutely inspire some other folks!

[CareyJo]

I love sharing and will continue to do so!  And as always, thank you for your positive feedback!

[Pesso]

Thank you so much! We appreciate you and everything you bring to the Club!

[139beautyco_llc]

I try not to discount services (although I could still improve in this area with friends/family). However, as a business that also retails product, it's better to sell the retail at a slight cost loss if it is about to expire and no longer be a viable product. This way you still make a small profit, and don't lose money. Then, making note of that product and not repurchasing or putting it on your shelves again if it didn't do well. Sometimes I think there is a little bit of trial and error when starting out in retail in figuring out what your clientele want from your brand/products. (Hi 👋, I'm a Cosmetologist running an individual salon suite).

[Pesso]

Thanks for sharing, @139beautyco_llc , and welcome to the Book Club!

Such a good takeaway on setting discounts around expiring goods. That's definitely one of the carveouts and exceptions that the authors give for discounting, and absolutely works! And a great point about using sales data and notes to make a decision on whether or how much to restock the item! 

Love the insights and can't wait to hear more of your thoughts as we go-

[Stacelyn24]

We've made a conscious decision not to rely on discounts for our services. Instead, we prefer to offer complimentary "abc" to add value to our clients' experiences. This not only showcases the breadth of our services but also allows us to introduce clients to other offerings or retail products we have available. It's all about enhancing the overall experience and ensuring our clients feel valued and well taken care of.

[Pesso]

Thanks for sharing, @Stacelyn24 ! 

That sounds like a really great way to do it! I love the sampling model, like you said it's a great way to cross-sell and get folks hooked on new things.

Y'all are doing great!