I just returned from a business trip to Israel, where I also had a little time to tour with an amazing guide. He took my companions and me from Jerusalem to the northern part of the Sea of Galilee, relating the biblical and recent history of each place we passed. He took us to places tourists couldn’t ordinarily go. He was charming, funny and extremely well-informed. For logistical reasons, I didn’t find out the price of the tour until the end of the day. I was expecting to pay perhaps $200-500. And I was glad to pay it. I got an incredible education.

His price? $300 a day. Not per person. Per day. My share worked out to $60.

You see, my guide priced his tour based on his costs. He loves to visit Israel, so he charges enough on tours to cover the cost of his airfare. But his pricing should be based on the value to his customers. I felt so bad paying only $60 that I gave him a substantial tip. But if you are a small business selling products or services, it’s very rare that your customers will think to tip you. They assume the price you’ve set out is fair.

So back to my original question- are your prices too low? If you price based on your time and materials instead of the value your customer receives, the answer is “Yes.” If your prices are too low, of course you will be missing out on profit, but there are other, more dangerous consequences as well.

The danger of pricing too low

Customers perceive pricing as shorthand for value. When customers can’t evaluate the quality of a product or service, they let the price be their guide. Diamonds are a good example. Most consumers can’t actually tell the difference between diamonds rated S1 or S2, so they buy based on what they are willing to spend.

If you sell something even moderately complex, it is easy to price yourself under and out of the market. Imagine I knew beforehand that my tour of Israel would only cost $60. I might have opted to do something else, thinking, “How good could it be?”

Determining the price

• It requires more effort to develop value pricing than cost-plus pricing, but here are some tips for your small business.
• Competitive analysis. Know what your competitors are charging and price yourself based on your value relative to their offerings.
• Customer research. Interview past customers to learn what they value about your offerings. If their value seems greater than what you charge, raise prices.
• Don’t be afraid to go for it. Price increases invariably spark lively and lengthy debate in companies. But most of the time customers hardly notice the increase (unless, as in the case of Wendy’s Junior Bacon Cheeseburger, you try to price well beyond perceived value. Each time Wendy’s charges more than $1, the experiment fails).
• Calculate your customer’s value. Some companies, especially business-to-business companies, can calculate how much value their products or services will give a customer. Take the time to do it, and share the results with your customers.

Finally, if you are ever in need of a private tour guide in Israel, send me a note. But hopefully his prices will be higher when you write- and the experience will be worth it.

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Local media- newspaper, TV and radio- love covering interest stories that involve local small businesses. Small businesses online can earn similar coverage from special interest blogs, Twitter users and other Internet media outlets. Basically, if a small business can craft a meaningful, intriguing story, they can get really useful PR.

Consumers can learn more about a small business through in-depth coverage than they would from a 30-second spot. Good PR helps consumers make more informed decisions by illuminating what makes businesses interesting, such as involvement in charities or social activism.

As great as PR is for businesses, media and consumers today, the discipline has come a long way since its founding in the early years of the 20th century. Then, it was seen as a way to manipulate consumers into consuming more. The father of public relations, Edward Bernays, said of PR:

“If we understand the mechanism and motives of the group mind, is it not possible to control and regiment the masses according to our will without their knowing about it?“

Bernays also asserted,

“The conscious and intelligent manipulation of the organized habits and opinions of the masses is an important element in democratic society.”

Certainly, Bernays’ tactics were successful in his day. He was instrumental in popularizing cigarette use among women, and he was horrified to learn that a dog-eared copy of his book, Crystallizing Public Opinion, resided on Joseph Goebbels’ shelf.

But his approach to PR no longer works. After years of being manipulated, consumers grew skeptical of marketing claims. Now consumers do their research and often know more about your products and services than your salespeople do. Effective PR in 2010 means being truthful and crafting stories that are of genuine interest to consumers. Businesses must ensure they are ethical and  respectful of consumers’ rights. Because if they aren’t, consumers will find out, and they will learn that there is such a thing as bad press.

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In their latest set of commercials, they very subtly insult their own customers. Observe as Crystal imagines herself to be a sparkling beauty queen:

Microsoft’s intended message: Windows 7 is so easy to use that everyone can appreciate it.

Microsoft’s actual message: Silly customers! You live in a fantasy world of glittery eyes and self-importance!

The secret to humor in advertising is that the customer should not be the butt of the joke. Modern customers have high opinions of themselves and their abilities. Mocking them will never influence them to buy your products.

I’m a Mac person myself, but I hear from developers that Windows 7 really is easier to use than past versions. Many people will probably upgrade due to this word of mouth. It’s a shame that Microsoft’s own advertising can’t complement this effort.

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Download the relationship marketing MP3 file here. (13.38MB)

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You’ve probably heard about relationship marketing. Maybe you’ve even taken some steps to create more customer loyalty by being more “friendly” with your customers. Indeed, developing customer relationships can be a great way to grow your business and profits. Steve Yastrow wrote a book about the topic, We: The Ideal Customer Relationship.

In Yastrow’s first chapter, he provides compelling evidence for developing customer relationships, stating: “Relationships have become powerful differentiators. Customers can’t tell if your product is better than your competitor’s product, but they can tell if they have a better relationship with you than with your competitor.”

Even better, the profit potential for developing relationships with your customers is high. In Yastrow’s research, he found that 89% of people prefer to buy from a business they have a relationship with; 86% would prefer to buy from a business that they have regular conversations with, and 90% prefer to buy from a business that talks with them about future decisions they might make. Here’s the real revelation, though: 79% of people are more likely to buy from a business they have a relationship with rather than the business with the best prices. Similarly, 86% would be more likely to refer a business they have a relationship with than to refer a business with the best prices.

“Wow!” you say, “Sounds amazing, but what’s the catch?” It turns out developing good relationships with your customers isn’t easy (but it’s still worthwhile).

The reason customer relationships are hard is explained in Dan Ariely’s bookPredictably Irrational. In chapter 4, “The Cost of Social Norms,” he explains that we live in two different worlds: one governed by social norms, and one governed by market norms. Ariely writes:

“Social norms are wrapped up in our social nature and our need for community. They are usually warm and fuzzy. Instant paybacks are not required: you may help move your neighbor’s couch, but this doesn’t mean he has to come right over and move yours.”

There’s nothing “warm and fuzzy” about the world ruled by market norms, however:

“The exchanges are sharp-edged: wages, prices, rents, interest and cost-and-benefits….When you are in the domain of market norms, you get what you pay for—that’s just the way it is.”

What happens when we develop customer relationships, and those worlds collide?

Ariely reports on an experiment in a day care center that tested the interchangeability of social norms and market norms. Parents usually viewed their relationship with the day care center as social, but when there arose a problem of parents picking up their children late, the center imposed a fine on latecomers (thereby introducing a market rule).  The instance of late parents actually increased, because parents now felt they were paying to be late and no longer felt any social obligation to arrive on time.

When the day care center reversed the fine, Ariely saw that something interesting happened. Even more parents started picking up their children late. Because introducing the market norm violated the social norm, parents no longer felt a social connection with the center. When the fine was removed, both motivators—guilt and the fine—vanished, so there was no compelling reason to arrive on time. Ariely sums this up by asserting, “When a social norm collides with a market norm, the social norm goes away for a long time. Social relationships are not easy to reestablish.”

How does this relate to business? Let me tell you a story about a normally reasonable person who got caught in the crosshairs of social norms vs. market norms, resulting in slightly deranged behavior. (Okay, I’ll admit it. I am that person.)

Two years ago, my husband and I were planning a trip to Maine. We chose to vacation there primarily because Maine is full of natural beauty and wildlife, specifically puffins. I had heard you could take a puffin-watching cruise, and I was enamored at once. We sorted through all the puffin-watching websites to choose the best-sounding one: it took you right to the main puffin island, where you would disembark and likely be only four feet away from the puffins. The website even had a charming story about the boat, company and captain. All of the warm, fuzzy feelings and my active imagination had put me solidly into relationship, social-norm territory with this company. And I hadn’t even called them yet.

When I did call them, I had to leave multiple messages on their voicemail. Each message assured me someone would take my reservation, so I wasn’t too upset. I felt like I was already their friend, so what’s a few missed calls between friends?

Finally, someone answered my call. She was rude, abrasive and crushed my hopes of seeing puffins up close and personal: The boat was full. They don’t keep waiting lists. Then, she hung up on me.

After I got over my grief, I became furious. I signed up for a yelp.com account and wrote a scathing review. To give my review clout, I even reviewed animal-related attractions I had been to in other cities. How dare they promise to show me puffins then take it all away? I seethed over this betrayal for weeks (just ask my unfortunate husband).

To me, our relationship was based on social norms. To the puffin-watching company, we didn’t have a relationship. I was just a person they forgot to call back…for months. They thought they made a simple customer service mistake that didn’t affect their business. After all, they filled up the boat, right? Maybe, but my yelp.com review remains immortal.

Referring again to Steve Yastrow’s book, We, he advocates creating special kinds of relationships that he calls We Relationships. It involves learning about your customer and using the information you glean to develop a relationship that feels unique, fresh and equally valuable to both customer and company. To learn more about creating these relationships, I recommend you read his book.

Developing relationships with your customers is the surest route to earning their loyalty, continued business and enthusiastic referrals. However, unless you tend the relationship with care, you risk creating a jilted customer. And we all know the adage: Hell hath no fury like a customer scorned.

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