Archive for November, 2008

“Cost savings” is not a competitive advantage.
November 3, 2008

Do not let price be a part of your business plan, business strategy, or business future.  Do not think that simply building a better mouse-trap at a lower price will yield success.  Do not think that offering to sell someone something they are already buying but at a lower price then they’re currently paying is a compelling reason to choose you or your company.  It’s not.  

One of the mistakes people make in sales and business, particularly the online variety, is to price their wares lower then the competition.  Intuitively, it makes sense that if I sell a book at $9 and Amazon sells it at $12 then I’ll get my fair share of orders.  However, there are a number of faulty assumptions about such logic, so many so that if you are counting on your price advantage to keep you competitive, then you are in trouble.  

1. The competition could lower their price and you won’t be able to keep up.  If you are in a market with competition, there is a good chance that someone out there is more firmly entrenched in said-market then you are.  Or they are more heavily capitalized, or they have better marketing, whatever.  As a result, they could eat your lunch on price at a moment’s notice.  Using the example above, Amazon could offer the book at a price below your cost until you simply disappear.  Web-services are no different – someone can (and probably will) offer a service like yours at a better price for as long as it takes for you to cry uncle.  Happens all the time.

2. The competition isn’t banking on price to win.  Using the Amazon example above, the folks at Amazon have worked hard to be thought of as a trusted name in what they do.  As a result, they can sell a book for $12 that you are selling for $9…and they will still sell A LOT more copies then you will.  Instead of trying to buy customers with lower prices, they have spent the extra money on marketing and infrastructure so that someone who purchases from them can reasonably say, “Yeah, it’s 30% more in price but I know my product will show up on time in the condition promised.”  

3.  Being the lowest priced makes you cheap.  True, some people may look for cheap, but anyone with a brain is going to immediately wonder why you have the lowest price and they’ll pretty quickly put together that you likely don’t have a customer service staff or you’re working out of your garage or your quality won’t hold up compared to the competition.  Shedding the “cheap” label is tough.  

This leads to the next point…

You shouldn’t let “cost savings” be your pitch because it doesn’t have to be and all you are doing is costing yourself money.  PEOPLE WILL PAY EXTRA for value.  They will spend money on Basecamp or Highrise even though there are free products that do the same thing because they know those products will work and if they don’t, 37 Signals will promptly answer any concerns.  People will pay more for a book or DVD on Amazon because they know they’ll get an email when it ships, the product will be in good condition, etc.  People will pay more for Widgets from Fred’s Widget shop if Fred says, “here’s my cell…call me anytime….and yes, we’d be glad to deliver on Saturdays for you” more than if Fred says, “I’ll beat any price by 15%!”

Sure, you want to be price competitive, but don’t think that simply lowering the price will bring in customers.  It won’t.  There is a reason people shop at HEB, Kroger, Ralph’s, etc. instead of Wal Mart even though Wal Mart is cheaper.  There is a reason people will buy concert tickets from Ticketmaster instead of walking up to a scalper the day of the show for a lower price.  There is a reason people will pay a dime more per gallon of gas at one store instead of crossing the street to a cheaper station.

There are a million ways to offer your customers and clients “value.”  Slashing your price to be the cheapest isn’t one of them.

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