Are Your Prices Setting You Up for Failure?

I recently had a couple of conversations with a local entrepreneur who was marketing a product that had mass appeal, but had determined to market it through a specific niche. That is a great strategy, and quite a few businesses do this. For example, websites specifically created for the photography industry or automobiles manufactured to be the "bling" like a 100-carat diamond.

While looking through the entrepreneur’s pricing structure, though, I realized there was a major choke point. Allow me to explain. In our Internet world, there are businesses that do well simply by marketing other people’s products and information; they are called affiliates. When you desire to market a product, you can either spend quite a large pile of money marketing your products yourself or you can market your products through partners or affiliates.

Typically in the affiliate marketing world, the affiliate receives 50 percent to 100 percent of the sale price on the initial item. For instance, if your product has a re-purchase factor to it, such as vitamins (you purchase them every month) or coffee (you purchase it every day on the way to work), the affiliate receives 100 percent of the price on the initial sale as you receive the long-term residual sales. Should your product have a one-time sale, or a sale that is very infrequent, the affiliate typically receives 50 percent to 75 percent of the retail price.

What I found interesting is that the pricing model this entrepreneur had determined acceptable was an 11-percent profit margin for the affiliates or partners. When I mentioned the low margin to the partners, they felt it was acceptable as they had been involved in similar pricing models themselves. My next question was: Are you making any money on these ventures?

I know of one personal care company -- a Fortune 500 company -- that will only deal with products it can sell for 10 times its cost. In other instances, I know of businesses that were floundering until they priced their products or services similarly to their competitors. I am not saying that marketing your product or service as the affordable or inexpensive alternative is an unacceptable model, but I am saying that pricing your product or service in a way that limits your margins, in many cases, hurts your sales.

Why is this? For two reasons: you can’t afford to stay open and continue to market your business as the profits are not there to do so, and your product is perceived to be cheap, not inexpensive.

About this time, I typically hear the arguments regarding Wal-Mart’s success, and my response is that the reason Wal-Mart is successful is because they assisted in moving quite a bit of manufacturing overseas as their suppliers could not afford to keep American employees at American wages and sell their products at Wal-Mart.

In addition, before Wal-Mart was K-Mart. Before K-Mart was Sears. Notice a pattern? Those companies marketing their products as the “low price leader” imploded over time as their margins did not support their overhead. I predict the Dollar Xs will, over time, take over a good portion of what was traditionally Wal-Mart’s customer base.

So, now I ask: Are you open to the continual challenges of being the low price leader in your market? Or, are you open to positioning your business in a way that allows for profits and continued growth?

Ted Leithart is the founder and president of The Leithart Group LLC and creator of C-store Marketing Systems. The Leithart Group is a marketing and business-building resource provider for independent convenience stores. Leithart's marketing expertise has been utilized to build and enhance more than 500 small businesses. He can be reached at [email protected], and more of his marketing insights can be found at www.CStoreMarketingSystems.com.

Editor's note: The opinions expressed in this column are the author's and do not necessarily reflect the views of Convenience Store News for the Single Store Owner.