FRAM SYSTEMS ^blog

Who wants the lowest price? How about everyone. Let’s face it, no one wants to pay a penny more than they have to for anything. How would you feel if you bought a new dishwasher for $399 plus a $50 delivery and install fee only to see the exact same model for $389 and free delivery the very next day? You just spent $60 or or about 15% more that you could have. How do you feel, about yourself and about the store that sold you the dishwasher?

OK, now that was a kind of trick question. All things being equal, if you actually paid the extra $60 you may well feel cheated, a little stupid for not having done enough or the right research and perhaps a little resentment to towards the dealer that sold you the dishwasher. But maybe you’re still happy with your decision, happy for a reason that has nothing to do with money or price. What if the folks that charged you more promised your new dishwasher would be installed Tuesday at 9:00AM and they would take away and dispose of your old dishwasher and all the other stores with free delivery could only promise delivery between 9 and 12 or 1 and 5 and you had to get rid of the old one yourself? Now which one was the best value?

You see, there are factors, often significant ones that make difference in any decision to purchase that have little to do with price. They have to do with value.

As a business owner, the pricing strategy you choose can make or break you. Yes, I used the words ‘pricing strategy’ because pricing is a strategic position in business. Moreover, having the lowest price is a loser’s game.

What happens when you compete on the ‘Lowest Price’

You know there are some shoppers out there to whom only one thing matters: price. If your price is the lowest on the day they’re looking to buy, they’ll buy from you. Just on that day and the thing they wanted. Chances are you’ll never see them again unless you happen to have the lowest price. Lowest price is where Wal-Mart lives. Those shoppers are called Transactional Buyers, they’re just looking to make a transaction. They kind of buyer we want are Relationship Buyer’s, those customers with whom you build an enduring relationship based on trust and value and will stay with that business through good times and bad time, high prices and low. They’re the people who recognize the VALUE your business provides and they’ll be faithful to you and your brand.

The Limbo Dance

Remember the Limbo Dance. Thats where each dancer has to dance under a bar that keeps getting lower and lower. If you fall down or touch the bar trying to get beneath it you’re out. That’s just like cutting prices is like. Eventually you will be knocked out of the game by more ‘limber’ competition. Only the business with the deepest pockets will survive and if he can hang on after such a competition, he’ll have the market all to himself. At least for a while.

So, although the always having the lowest price is not generally a good idea, it can sometimes help to bring in some new customers who will probably be mostly Transactional buyers but will probably include some Relationship buyers as well. Its your job to figure out how to give the most value to everyone in such a way as to lay the foundation for the Relationship buyers and get them to keep coming back.

How can we devise a pricing strategy?

First take a good look at your competitors. Don’t just look at their prices, Look at their offering in its entirety. That could mean everything from how they greet their customers to how posh or upscale their store is. For manufacturers it could mean added values like custom design service or flexible ship dates. Discover what extra value they add to their products or service.

Now think about what value you can add that your competition doesn’t. More importantly find out from your current or potential customers what value they think is important. Is it quality, personal service, delivery schedules, support, product range - being the one stop shopping source?

Then find out what is the value, in dollars, that your added value is worth. Here is where some scientific testing is in order. If it costs you more to deliver a higher perceived value than the market will bear than you’ll have to rethink your position.

Also think about how your offering looks against your competition. How is the value you provide stand up to theirs?

The science

Answering these questions is important for many reasons. Your pricing strategy could be designed to build market share or it could be geared towards maximizing profits. Either way you will need to know your customers and what is important to them. Ask them questions in the form of surveys but don’t be a nuisance. You could even pay a consulting or research firm poll your current and prospective clients. Try to discover things like what degree of importance they assign to quality, service, price, etc.? How much do quality, distribution, and service contribute to perceived value?

When you understand your market, you can begin to do things like measure how increases in price effect your sales volume. Often the market will bear more than you think and you could be missing out on profits by charging too little.