101 Ways Pricing Is Choking Your Business

# 37: Vanilla Pricing

Recently I had a chat with the proprietor of a pastry/cake shop. The shop had just celebrated its first anniversary, however she was struggling with reinvesting back into the business for growth because her profitability was not growing despite the increased volume throughput.

As we dissect some of the drivers of low profitability, the usual suspect of rising costs came along. However I suspected her problems lay elsewhere. so I popped the question, “Tell me about your pricing, how do you price your products and what data points do you use to inform your pricing decisions?”

At first she looked flustered as if unsure how the pricing discussion was related to her profitability problems. As far as she was concerned the rising costs were the main problem and if she could find a way to control them she would improve her profitability. I was already impressed by her approach to understanding her costs with clearly costed recipes and standard costing for items like utility and labor.

“I price my cakes and pastry by the kilo, you see when we started we did a market research to understand how others shops were approaching pricing. As was market custom we also started to charge everything per kilo even though our entry prices were lower to penetrate the market. So all our cakes sell for the one price per kilo and our cookies at another price per kilo” she replied once she had collected herself.

“Do you believe that this per kilo pricing best represents the value that you create for your customers?” I asked. However she wasn’t sure where this was headed and looked at me expectantly waiting for an elaboration. “Does a Chocolate Cake taste the same as a Mint Chocolate Cake”? I offered

“Not quite” she replied and I could tell she was starting to appreciate the concept. “Since I introduced the Mint Chocolate Cake, I see that more of my customers are ordering for that in place of the pure Chocolate Cake” she added.

“Who pays for the extra costs of the Mint flavor?” I queried further “if your customers perceive the Mint Chocolate option as better than the Chocolate Cake, how much more do your think you could charge them over and above the plain Chocolate option?”

“Although the actual costs of the additional flavor is small, I believe I can charge up to 10% more for the Mint Chocolate option because my customers perceive it as being superior” she shot back.

“Well, how will that affect your competitiveness? Could that lose you customers?” I probed still

“We should be competitive still….i think!, as I mentioned our pricing was set lower to penetrate the market and therefore even though we raise our prices we will still below some of the big cake houses! She replied with a light blush crossing a face and I could the light bulbs coming on as she continued “I also believe we have a captive market as we are located closer to our customers and we offer free delivery”

Right then I got the sinking feeling that we will soon be seated back here addressing that small matter of free deliveries. Maybe I’d better order my tea biscuits before I suggest a different pricing model for the service, I thought to myself.

“so what else do you see you could charge differently on?” I asked

“There is one thing I have thinking about, but I haven’t the slightest idea on how to do it” she replied. “Your see out biggest move is birthday cakes and clients often ask for varied decorations for their cakes, mostly it is cartoon characters, nothing fancy like that TV show Cake Boss you know” she continued. “Some of the designs are really complicated and take time to execute say your child wants a spiderman design that is more intricate vs. Say someone else who wants a football design” she shot back

I had not thought about design as a drive of overall productivity in a cake shop! So I caught myself quickly enough to shoot back “So what prevents you from charging different based on the times it takes to do the designs? Are your customers willing to pay differently for different designs?”

“Nothing really, I just haven’t tried” she replied in a dejected manner

“How would you go about implementing this change” I quizzed.

To which she replied “Well I could start by creating a rate card, so similar designs are charged a certain rate e.g. one rate for Spiderman, one for Bluey, One for Among-Us etc. Then I will introduce this with new customers and slowly ease in my usual clients”.

“That sounds like a fantastic plan, why don’t you try it then we can review progress next time we sit down for coffee” I said enthusiastically beaming in the knowledge that we had identified some strategies to grow her revenues and profitability.