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Business Toolbox: Setting a Price

Establishing price is based on three things: 1) Your costs 2) The profit you hope to make 3) The price your customers are willing to pay.

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Establishing price is based on three things:

1) Your costs

2) The profit you hope to make

3) The price your customers are willing to pay

Assessing that final component can be daunting, but you should try to gather clues about how customers perceive your products and services – and your dealership as a whole. Do they believe you have something unique to offer? Are they aware of the features that set your products and services apart from other tire retailers or distributors? Do your customers feel you understand their specific needs?

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Pricing is extremely important when it comes to selling tires as consumers continually look for the “cheapest tire in town.” However, offering top-notch service and telling customers that paying just a little more for their tires will help ensure quality and durability can go a long way.

As a small, independent tire dealer, you may be able to justify slightly higher prices because of the highly valuable knowledge, expertise and personalized service on your side.

Think of pricing as a continuum. Customers generally have a low-end price and an upper-limit price in their minds. If you set prices too low to try to compete with the “cheapest tire in town,” most consumers will naturally be concerned about the quality of those tires.

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Here are several pricing strategies to consider:

Discounts – Generally, businesses discount prices to introduce products, encourage early-bird buyers, reward prompt payment, extend the selling season, clear out slow-moving inventory, and promote volume sales. Base discounts on the return they will produce. Just be wary of discounting too much too often, training people to only buy when there’s a sale.

Price margins – This strategy typically involves pricing products at a set percentage above cost, setting margins as a group rather than individually. For example, you might establish different margins for different tire brands. You may price one tire line low as a loss leader, then make up the revenue by spreading a price increase across the rest of your lines.

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Captive pricing – Companies that use this strategy sell a basic item at a low cost, then make up for it by selling the necessary accessories and service at a higher profit. Tire dealers that use this strategy would presumably make their real profits on service, not just on tires.

Bundled or a la carte – Consider, also, whether your wisest pricing strategy is to sell a set of tires as one unit or separate tires as several units that are slightly more expensive. You need to weigh the benefit of making the buying choice easy for customers vs. giving them more choices.

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No matter which pricing strategy you choose to implement, remember that settling on the “right” price is an ongoing process; it’s not a task you handle once a year and then forget about it.

Costs, customer perceptions, market conditions and competitors’ pricing change continually. That doesn’t mean you should drop your prices immediately just because the tire dealer down the street does; in fact, taking a wait-and-see approach is often the best response.

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