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JOHN WARRILLOW

Pricing to protect gross margin Add to ...

One of the most important statistics predicting the likelihood that a startup will survive is its gross margin: how much money is left over to cover operating expenses after paying the hard costs of what it sells.

The fatter your gross margin, the more mistakes you can afford to make in figuring out your business model.

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Think of gross margin as your learning currency –in the early days of any business, it’s all trial and error.

Given the importance of gross margin, I was disappointed to see the Ugi Fitness Inc. team offer a $25 price discount for its “ Ugi at Home System” as a reaction to supply problems delaying customer shipments.

I think it’s the wrong call and will tap their cash resources even further.

I asked Ugi co-founder Debra Karby about the decision to drop the price.

Her response: “It was something we wanted to do to help with the long wait time, but, in truth, while we have put it [the $25 discount offer]up on our site, we haven't started pushing it yet. We are doing some creative around ‘be thankful’ and the campaign will run officially from Canadian Thanksgiving to U.S. Thanksgiving, basically covering the time we are on back order.

“The goal is to fully launch Monday with both the promotion and the first 'Get ready to Ugi' newsletter concept you gave us.”

I understand where the Ugi team is coming from but, as a startup, I think they should do just about anything other than lower the price. Ugi – and any startup – has to beef up the perceived value of what it sells to protect their gross margin.

When I read the comments following my first article in this series, everyone said the $189 price point for the Ugi at Home System was too high.

Again, I asked Deb to comment:

“I think our biggest hurdle is explaining that this is not a product that can be compared to a fit ball (rubber ball filled with air – the ones people sit on) that can be purchased at Wal-Mart for $24.99. We always wanted to create a premium product, one made of quality and that would have longevity.

“I think one area we need to work on is selling Ugi not as a 'ball'. The ball is one piece of the total body workout system. We have actually made a recent decision to take the ball only off the site because selling the ball as a piece of equipment doesn't fit into our vision, mission and values. We want to help people get fitter faster, in their own home, with a style of training that you can't get from aerobic videos. I guess it depends on the value you put on your health and wellness. If you compare the Ugi at Home system to the purchase of a treadmill, set of dumbbells, bosu, fit ball combined, you actually have quite the deal on your hands. Or the cost of a personal trainer - three to four sessions and you've spent $180. I am always amazed by people who react to the price point, but who I know are also wearing $250 jeans or wouldn't hesitate spending $150 on a nice dinner out.”

Personally, I don’t think $189 is a lot of money to get in shape when you compare it to other options, like a gym membership or a BowFlex home gym.

But the readers’ perception was that they would be paying $189 for a glorified medicine ball. In reality, customers get the ball, a set of five DVDs, a workout guide, an eating right guide, and an iPhone application.

But perception is reality when it comes to getting people to take out their credit card.

Ms. Karby elaborates on Ugi’s pricing philosophy.

“People thought [ Lululemon Athletica Inc. founder]Chip Wilson was crazy when he said women would buy a pair of stretchy, black spandex pants for $125, but [he]has managed to sell a lifestyle and a belief that his product is way better than the pair you can get down the street for $45. How do you keep your premium price point without having to always justify it? And what do you do when a competitor comes in and makes one for half the cost?”

Instead of discounting, my suggestion would be to keep the price high to protect their gross margin, and experiment with different offers to improve the perceived value, without adding to their costs.

I would suggest testing different Ugi at Home System packages, and checking out the corresponding conversion rate.

Personally, I find including “a no-nonsense guide to making good eating choices” and the “free Ugi iPhone app with interval timer” in the Ugi at Home System takes away from the credibility of the overall offer.

Most iPhone apps are free or very cheap, and you can get all the nutritional information you want online.

Therefore, as a starting point, I’d actually experiment with reducing the Ugi at Home System bundle to just the meaty items: the ball and a five-pack of DVDs, and see how that offer tests for a week.

Then I’d test adding a 52-week series of online seminars where users can meet once a week online to get encouragement and tips directly from the Ugi team. The online seminars would be very low-cost for the Ugi team to produce (all you need is a GoToWebinar account) and they could add significantly to the perceived value of the Ugi at Home System.

Then I’d dream up a third offer and see if I could trump it with the winning conversion rate.

The critical part of arriving at your ideal combination of perceived value is testing. As an e-commerce business, Ugi can easily test various offers by keeping the price point constant and dividing the number of people who buy into the number of people who visit the “shop” page in a given period.

Today, if one out of 500 people who visit Ugi’s “shop” page buy, they know their starting point is a conversion rate of 0.2 per cent. That becomes the benchmark they need to beat.

What pricing advice would you give the Ugi team?

Special to The Globe and Mail

John Warrillow is a writer, speaker and angel investor in a number of start-up companies. You can download a free chapter of his new book, Built to Sell: Creating a Business That Can Thrive Without You.

Join The Globe’s Small Business LinkedIn group to network with other entrepreneurs and to discuss topical issues: http://linkd.in/jWWdzT

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