Whenever I read adverts, or see them on TV, there’s often a common theme… “we are the cheapest, cheaper than, lowest prices in the UK” etc.
Depending on your market, competitive pricing alone is a risky strategy – let me explain why…
Let’s use an example of supermarket chains. Many years ago one chain was dominant. Along came another name and suddenly competition became intense. Prices were lowered and a price war began. However, over time prices rose again until a third chain opened its doors. The price war repeated, although this time there were three competing parties. The pattern continues to repeat over the years as more stores are opened.
Whilst the consumer benefits from lower prices in the interim, this method of competition cannot be sustained long term. The stores wish to retain good profit margins and therefore they create this through two methods.
1. Demanding lower prices from their suppliers
2. Paying suppliers over a longer period.
Over the years, many of these suppliers have ceased trading because they simply cannot afford to sell at such low prices whilst simultaneously providing longer credit. The cost of credit coupled with smaller margins drove them into bankruptcy.
Additionally:
- Unless your overhead costs are incredibly low, it is very difficult to make good profits. Without good profits your business is always at risk.
- With competitive pricing, it’s important to maintain high volumes in sales. Small profit on volume sales makes for a successful year, however low sales push the business towards insolvency.
- There is always another business that enters the market with lower overheads and can undercut your prices. Many markets are global and therefore subject to oversees competition where labour and other running costs are considerably cheaper.
- Customer loyalty is very low in businesses that trade purely on price. If a customer can purchase the same product elsewhere for less, then they usually do so. All they care about is finding the lowest price and how much they can save. However, this doesn’t help your business if you are losing customers because you cannot compete.
Competing on price is like entering the race at the bottom. It’s not a race to be in. It’s a high pressure situation and one where really poor sales figures can have a colossal impact on the business. Being in business is supposed to generate win-win situations. Competitive pricing does not feel that way for most business owners. They are losing profit every day to satisfy customer demand. This will soon transform into a survival mentality, finding any way to save a few pence on cost to pass onto customers in lower prices.
Next, let’s take a quick look at value based pricing… from your customer’s point of view.
You are always too expensive when the price or fee is considered greater than the perceived value from the buyer’s perspective. Isn’t that true? If your customer cannot see the value to them in what you offer, then clearly you are too expensive.
However, it’s always great value when your customer considers the price or fee you charge is lower than the perceived value.
So how do you get the price/value balance right?
Once you have assessed your price/value offering you have two options:
1. You can increase the value of your products or services
2. You can lower your prices.
In many cases, it’s better if you can retain your price and increase the value. Depending on what you are selling, this could be achieved in a number of ways.
As I said before, it’s easy to lower prices. It doesn’t require a lot of thought. It doesn’t require creativity or special skills. Anyone can do it. It’s an easier decision to lower prices, but in business it’s rare that easy decisions are the best. Additionally, a simple search on the internet may prove to you that there are numerous other businesses offering cheaper pricing. And here’s the important point…
High value providers in any industry are rare. When a customer sees the value and recognises it is rare, they are prepared to pay premium prices! They tend to be very demanding customers however, when you are receiving considerably higher profits in the same market, you can afford to provide a superior service to these customers.
There are three critical questions you need to answer…
- Have you pumped so much value into your product/service offering that the price or fee represents great value? No matter what market you are trading in, the quality brand in the market offers superb value at a great price. Note which way around the words value and price are stated. Let’s be realistic. You cannot offer premium pricing for a product or service that is considered average or just above average.
- If you currently offer products or services which represent superb value, is this value clear in your marketing? In other words can a prospect clearly see and understand the value you portray in your marketing? If not, you have a problem and need to address this. As people buy for their reasons, you need to articulate in a number of ways how and why your product or service provides such excellent value.
- Is your marketing attracting the right type of prospect? You can sell an amazing product at a superb price but if your prospect cannot afford it then you are wasting your budget. Find the correct target market for the value based pricing strategy you are using.
It takes time to get the value balance right and a lot of focus on the market, your customers and the products and services you offer. Look for gaps, inconsistencies and flaws between what you charge, what you offer and who you are marketing to.
When considering value based pricing, it’s important to consider packaging – how are your goods / services displayed and delivered? Cheapen this area and you may find customer perception of the product diminishes. Therefore concentrate on the little things, the incidentals because they contribute to overall perception e.g. let’s say you are shopping for a ring. You visit one jewellers who provide a good price. You can purchase the item and it is placed in an envelope. You are amazed when you visit the next jewellers and the display is so much better, the item is presented in a beautiful box and there’s a special cleaning cloth and cream included in the price of the ring. Also included is a special free clean in the first year after purchase. The cost of the ring is higher than the other jewellers. Which is more appealing? Depending on your thoughts about the object you are buying, and whether it’s for you or a gift, the second description using value based pricing will be more appealing. Of course this doesn’t mean everybody will choose it. However, multiply this over numerous transactions in a year and the difference in profit and perception of the shop will be significant.
Your value based pricing may also require packaging in respect of secondary goods to support the product e.g. if you sell a printer, then the offer may be supported with extra size ink cartridges and a small supply of paper. These little extras may have a relatively small cost but when added to the base product, magic happens and suddenly perceived value of the product is significantly enhanced.
You will always be able to sell a high quality product or service for a good price if it represents great value to the end buyer and you have marketed this correctly. If you are struggling, then all this suggests is that you need help in one or more of these areas.
Choosing between competitive pricing and value based pricing strategies is not easy. From a business owners perspective, the most important aspect is keeping your customer happy so that they tell others and return to your business many times in a year. How you consistently achieve this is based upon the customer perceptions you influence. Choose well and consider both short term and long term.
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