That question is an economic trigger. It makes or breaks a business. It pulls the economy forward (and maybe backward).
What happens beyond the “How Much?” question determines the fate of any business, industries, and even an entire economy.
But it doesn’t merely have to be “fate”. The outcome can be controlled.
It all centers around the magic word: Price.
Prices are the central hinges of a market economy. Every dollar of revenue and profit that a company generates us the direct or indirect result of a price decision.
Everything revolves around prices — everything from your business profits to the economy; from how your cash flow situation is to the average pay of every person who works for a living.
Despite the “all pervasiveness” and importance of pricing — in addition to thousands of books, articles, research journals, and blogs — many entrepreneurs and even large businesses struggle with pricing.
Struggling with an admittedly mysterious and complex aspect such as pricing is one thing; “commoditizing” your products or services and chasing the “lowest price, we’ll pay the difference if you find a lower price than this” approach to business is something else.
The usual tendency of almost every business, unless you are willing to put in the work, is to price lower.
In the hope of getting more business? Because you wanted to grab the market share? Or maybe you thought it’d a temporary “launch special” and then you had every intention of increasing your prices?
You forget something: In the market, habits form fast. By pricing yourself low, you are making your customers expect just that from you.
Should you, as a business, charge what you are worth or charge as much (or a little more) than what it costs you to produce something?
If you are a service provider, would you charge by the hour or would you charge a premium?
Most entrepreneurs are usually at a loss when it comes to “pricing”. In fact, it’s one of the most complex aspects of a business, although it doesn’t seem like it.
While pricing can be elusive, the need to keep your business afloat, to pay the bills, to honor your bills, to maintain cash flow, to pay those salaries, and to meet the business overheads are all as real as they get. Also, they are recurring payments (mostly) each month.
So, what do you do?
You get desperate. You ignore years of research.
The omnipresent advice about charging higher than you do right now? That goes right out of the window.
You then get down to price wars. You engage in the never-ending rut of competing in the market based on price alone.
That, right there, is business suicide.
It doesn’t have to be that way. Here are a few tips:
There are no winners in the price wars; You only lose
Peter Drucker once quoted very eloquently in an opinion piece in The Wall Street Journal in 1975:
“It’s not the business that earns a profit adequate to its genuine costs of capital, to the risks of tomorrow, and to the needs of tomorrow’s worker and pensioner, that rips off society. It’s the business that fails to do so. “
In a typical war, there are winners and losers.
Engage in price wars though, and there is only one outcome: Complete loss — for you as a business and for the entire industry. Later, it also affects the economy.
If you find yourself crying out aloud about just how “cheap” or “inexpensive” your products or services are, it’s the worst spot to be in because you’ll never win on price.
It’s pure logic: selling at a price equal to or less than the cost of making products or delivering services is mathematically (and logically) loss-making.
Regardless of just how much you might sell in volumes, you are essentially making losses for every sale.
People don’t buy drills. They buy a solution to make holes. In fact, they essentially want to make a hole in the wall so that they can hang their children’s photographs, or family portraits.
You don’t buy that latest iPhone because Apple makes it or because it has two Megapixel cameras on the front and the back — you buy an iPhone because of how it makes you feel. It makes you feel proud. It makes you feel “rich”. It makes you believe that you several notches above the rest of the “droid” crowd.
Typically, major brands do this with consistent advertising with a singular focus: Making you feel _____ [ depending on what they sell].
Price then is only a matter of people connecting emotionally with that consistent message. When we are all convinced, and when we connect emotionally with the brand, we buy regardless of the price and then justify that price we paid.
When that’s a reality around you and us, why price low?
Market bears every price point
The average price of an entry-level luxury car is around $40,000. Some luxury brands sell cars up to $100,000, or $400,000, or even $2.8 million for a single car.
There are some that go for sale on auctions costing up to several millions, and that too for an old car which is meant to more of a collector’s item.
That’s horrific, if you think about it. Vanity at its best.
Cars are depreciating assets and they have no real value except transporting you from point A to Point B. The entire automobile industry plays the “vanity” game and they do it very well.
For a long time now, people have been “aspiring” to buy cars. The more expensive it is, the better it is.
The sheer illogical buy that a car can be, it makes the case for a great point to write home about: the market will bear the price. Any price. As long as customers “feel the need” to buy.
Vanity or not, some people want to show the world that they’ve arrived. Or that they have it so they’ll flaunt it.
So, there are buyers for such cars.
Every Rolex might have story, but each watch costs several hundreds to thousands of dollars per unit.
People buy rolex watches.
Similarly, for every product on sale that you might have thought “that’s absurd”, there are buyers.
The more there’s a connect between people’s emotions tied in to their wants or desires, the lesser the importance of price.
What does that tell you? The market can bear any price point as long as you are able to convince your target customers that your product can solve a problem:
- Better than your competition can.
- Faster than your competition can.
- Or simply make you “feel” special, as if you belong to an exquisite club of aficionados.
Either way, price is not a problem as long as people can be convinced that they need to “own” something.
Price is equal to perception
“A customer’s opinion of a product’s value to him or her. It may have little or nothing to do with the product’s market price, and depends on the product’s ability to satisfy his or her needs or requirements.”
Even if the actual value of your product or service is objective, perception isn’t reality. Your consumers may view it differently.
According to Alex Birkett of ConversionXL, perceptions play a huge part in how brands price their products and services. He has a few examples to share:
- When people wash their cars, they believe that cars drive better.
- Branded painkillers are perceived to be more effective, when it reality they are just as effective as non-branded ones.
- Cars are only one segment lower (with the feature set) as that of a Mercedes Benz or a BMW and that’s only because how people perceive brands and are willing to pay a premium for them.
We know for a fact that:
- Ordinary food in a fancy restaurant costs more only because you perceive it be worth it, when it’s still ordinary food (and most times not even half as delicious as street food).
- Brands like Ralph Lauren, Nike, Reebok, Gucci, Armani get their products manufactured in the back alleys of Bangladesh. Yet, its customers are prepared to pay a premium for each of those brands.
Making a few tweaks to how and what you communicate by using a well-executed marketing strategy, showcasing a consistent brand for a long time, and connecting emotionally to people is a surefire way to escape price wars.
Less supply = More price
There’s a story called The Legend of the Potato King exemplified by King Frederick II of Prussia that goes like this, in a nutshell
The King rebranded potatoes as a royal vegetable. They made it exclusive to the royal family and hired guards to protect the potatoes.
Eventually, people started growing potatoes in secret and they became higher value in people’s minds.
Here’s the full story, if you are interested.
Potatoes can become luxury products too, you see?
When something is less available or produced in lesser quantities or if products and services are available to a select few (like the Black Centurion Card by American Express or the Invite-only Rolls Royce Cullinan), price becomes less important than people’s ambition to want those products and services.
Build a brand, price higher, or go exclusive
Here’s a fact, a little something you should do right now: take a cold hard look at your own prices. Compare your prices to your competition. Are you priced higher or lower?
If lower, figure out why.
The answer is most probably, it’s because you believed (and convinced everyone else, including your competition and your customers) that your price is where it is because you thought that’s where it should be.
Go all in with your content strategy, branding, and product positioning. Even how your website makes an impression.
Make simple tweaks such as:
- Reframing your brand, products, services, or the message you are sending out with a proper and consistent approach to marketing
- Making price irrelevant
- Raising the stakes
- Boosting the perceived value of your products and service
- Willfully over price to stimulate curiosity
- Limit availability of your products or services
Impressions and perceived value matter as much as pricing itself does.
Price wars are a losing proposition. Stop commoditizing your products and services. Agreed that marketing is like a Swiss army knife, that you have multiple things to worry about as a new age entrepreneur (including a global marketplace).
The default is that customers fixate on price. It’s up to you as a business to turn the tables around and make your pricing strategy work to your benefit.
Stop nibbling away at your own profits.
Pump up the value.