In this transcript, Clay Clark (U.S. SBA Entrepreneur of the Year) and Jill Donovan (founder of Miranda Lambert-endorsed, Rustic Cuff) discuss the preception of pricing on Thrive15.com, one of the top business schools in PA.
Clay Clark: I want to hammer this home, if you're watching this and kind of going, "I'm starting to get it, I'm starting to have a break through here," one lady that I'm very good friends with, she helps put products in retail stores. She's a rep who helps put products in stores. They had a line of toasters that was in a very, very prominent retailer that was not moving. It was just not selling and they had ... the toaster, I'm making up the number, but it was maybe like $50.00. They came up with a toaster that it's the premium elite toaster, that was $400.00. They just made it insanely priced, they added some bells and whistles to it, it's like $400.00 or $500.00. What it did, is it made these $50.00 toasters of a sudden look like they were a screaming deal, and people were buying them.
Jill Donovan: Sure.
Clay Clark: It's perception, you can always perceive, you can always dress up something to greatly affect the perceived price. I want to ask you, is it possible to ever to be too profitable of a product? Is it impossible to have a product that's just too ... the mark of it is too great? Is it possible?
Jill Donovan: I don't feel like it is, but you're probably going to disagree with me.
Clay Clark: I don't disagree with you at all.
Jill Donovan: Okay, no I don't think it is.
Clay Clark: Even if I do disagree for the record with her on camera, she's always right, I'm always wrong. I'll sit corrected.
Jill Donovan: That's why I love Clay.
Clay Clark: Okay. Now here's the thing, what is the lowest profit percentage that I should ever charge my product? Do you think its 20%?
Jill Donovan: I think that ... depends ... You can have a range of products and one could make 75%. There are the things what I call Loss-Leaders, which you I'm sure you know what that is, but there are ...
Clay Clark: Can you explain what a Loss-Leader is to people that maybe that if I don't know what it is to people? You can find more videos on this on Thrive15.com, one of the top business schools in PA.
Jill Donovan: For example, let's say ... let's just go ... that everything that I make costs $5.00. Just go ... it doesn't, but let's just say it did.
Clay Clark: $5.00
Jill Donovan: Let's say I set one of my products at $200.00, okay. I make $195.00 on that, then I'm going to set another product say for $7.50, because I know it's going to get people wearing a rustic cuff. I'm not going to make ... after I [ship 00:02:12], I'm not going to make hardly anything on that. The Loss-Leader would be that particular product, because it gets people in, it gets them hooked.
Clay Clark: You're basically okay with not making a bunch of money, therefore losing the opportunity to make a lot of profit ...
Jill Donovan: Yes.
Clay Clark: In exchange for the ability to really get in the market?
Jill Donovan: In exchange for having them come into the family ...
Clay Clark: [Ooo 00:02:32] the family.
Jill Donovan: The family, and sort of get them introduce to rustic cuffs. There's a ... that's where in this instance, is where it's okay not to have that percentage, 20% is what you're saying or more, it's okay because you have a product that you don't mind losing some, because you know in the end you'll gain.
Clay Clark: I want to make sure you're getting this guys, if you're watching this. If you own a retail store ... Sam Walton ... I ... His book is phenomenal, but he did a deal where he made pantyhose as cheap as possible. I'm reading his book and I'm like, "What?" As a dude, I'm very ... I'm sort of [inaudible 00:03:09] familiar with the concept of pantyhose, let alone that this guy whose ... I envy as being one of the wealthiest people and one of the most successful ... I look at him as being a hero, and he's going, "What I did is I priced pantyhose for just nothing, or watermelons and I'm losing money on every watermelon I'm selling. What I did is that people would come in, the Walmart family, they would come in the store and then they would buy more."
Jill Donovan: Sure.
Clay Clark: This guy, if you read his book it's phenomenal. He actually did goats, where they had goats and donkeys in front of the place where you ... like a petting zoo in front of the first couple of Wal-marts. Free ice cream, just to get people in the door. If you own a retail store this principle still applies, whatever you can do to get people in the door then they'll buy more.
Jill Donovan: Yeah absolutely.
Clay Clark: I love that. Here, a question I have for you, are there any rules that you have just off top of your head, that you said just kind of rules of thumb that you have to make sure that you don't price a product too low now? Do you have a rule of thumb, do you ever walk around the office and say, "No, because ..." Do ever have a rule of thumb that you use?
Jill Donovan: First, I have to get back what I put into it ...
Clay Clark: You have to get back what you put into it.
Jill Donovan: Bottom line you have to ... If you're talking about that product or that Loss-Leader, you have to get back what you put into it.
Clay Clark: You have to get back what you put into it, that's Jill Donovan boom.
Jill Donovan: Or else you're losing. Too low? It goes back to that perceived by I don't want to have a product that makes people ... that turns people away, because they're like, "It must be cheap, because it is set at this price."