Pricing For Profits

by Ed Newman
AMSOIL Marketing & Advertising Manager
This article appeared in National Oil & Lube News, June 2001

Many years ago I heard an interesting story about Mario Puzo, author of The Godfather. After many years of cranking out novels, Puzo achieved fame and fortune with his blockbuster hit about a mafia family. Overnight he was fabulously wealthy. His instant fortune, however, did not lead to happiness. Sure, he did everything money can buy, in excess. He traveled round the world and pursued all life's pleasures. At the end of a year he says he was bored.

To Puzo's surprise there was one thing that never bored him. Books. Puzo discovered, as so many have before him, that there is nothing on earth like a good book.

LESSONS FROM DRUCKER
I have been reading some interesting books lately. One, by Pulitzer Prize winner Thomas Friedman, is called The Lexus and the Olive Tree. It's a book about the impact of increased globalization, topic of my last column.

A second is Peter Drucker's Management Challenges for the 21st Century. The title may sound boring to some, but Drucker compresses a lifetime of insight and observation into this fascinating volume.

I originally found Drucker's book on cassette at the library. Books on tape are part of my morning drive. In his intro Drucker emphasizes how our assumptions determine our realities and how all too often we get locked into our boxes because we can't see things as they really are due to our assumptions.

To paraphrase, what is trendy is not always what is right. Throughout the book Drucker challenges our thinking. For example, it was once taught, and widely believed that there is only one right way to manage people. We have since learned that people need to be managed different ways, just as we
have different ways of learning.

In his chapter on "Information Challenges" Drucker discusses a shift in thinking with regard to pricing and costs. It has always been a basic principle of pricing that prices be established somewhere between a cost floor and "what the market will bear." In other words, you need to establish a price that is higher than costs, or you lose money every time you make a sale. The problem is in how we determine what an oil change costs.

Traditional process costing add up the cost of materials, plus cost in labor for the fifteen minutes of service, and maybe includes overhead. But what about the cost of unloading supplies, of moving inventory around, and the time involved ordering new parts? The real cost should incorporate all of the activities of being in business. This is what it costs to do an oil change. What is the true cost of your operations? 

The other mistake we make pertains to what we believe the market will bear. We are so accustomed to selling on price that we have demeaned the value of what we sell. This is especially so in the oil industry. Historically, oil has always been sold as a loss leader. The message communicated to consumers is that it has no value. The result of this kind of pricing model is that in the quick lube business, people think the only thing they are paying for is the service. The oil must be practically free.

In establishing our prices we err on both sides. First, we make a mistake by not properly determining our price floor. On the other hand, we fear having prices too high because we do not believe in the value of what we sell.

A LESSON FROM HISTORY
Here's an interesting blooper that teaches a valuable lesson about pricing for premium products. During the Depression typical newsstand prices for magazines ran in the neighborhood of ten cents and twenty cents an issue. In 19333 Fortune magazine made its debut, but as a result of an error the cover price read $2.00 for the premiere issue, ten times the normal price of magazines of that time. Surprisingly, customers ate it up. "If it's this pricey, it must be good," ran the logic. The magazine, on the other hand, also made a good move by deciding that if it's priced this high, we better make sure the product is worth it to our readers.

How high can a price be before a product or service is priced out of the market? The story of Fortune shows that it is often not what you think. 

Not all oil is created equal. Premium synthetic motor oils can easily command higher prices. Before you say, "No one will pay that," think about the publisher of Fortune. How high is too high? When you attach value to what you are selling, you may find that the limit is twice what you expected.

TWO MORE ITEMS OF INTEREST
Interesting advice found in The Book of Inside Information, published by Bottom Line Personal, Boardroom Classics: "Synthetic lubricants are a better buy in the long run than natural products. Advantages: Better reduction of friction and absorption of engine contaminants. Users report as much as 50,000 miles driving between oil changes. And there is little evidence of wear on engines that have logged 250,000 miles."

Here's another note that I found interesting. An internet magazine presented the following stats regarding the reasons people like to shop online. 73% like the convenience and ease. 69% like avoiding crowds. 63% shop online to save time. (Source: Anderson Consulting) What I find striking is that all three of these could be cited as reasons people value and appreciate extended drain intervals.

No question technology has changed the way we communicate. Advances in motor oil technology are also changing our auto maintenance habits. The essential thing is that we place a value on this convenience and time savings by pricing it properly, profitably, and in a manner that indicates we are offering value. The new synthetics are not your father's motor oil.