My first piece of advice to a new client is typically, “Raise your prices.” The typical response to that advice is, “If I do that I’ll lose too many customers.” In my experience, my clients’ fears are never realised and they end up making the extra profits they could have already been making, if their fear had not held them back.
Pricing strategy is one of the most critical management decisions in business. Yet most owners or managers of SMEs use a low to mid-market pricing strategy as their main competitive weapon. When I ask clients about their level of quality and service, they almost invariably tell me that they are as good as, if not better than, most of their competitors. “Then why,” I ask them, “do you set your prices at the lower end of the scale?”
Most small business owners think that pricing low will win them more customers. This is simply supply and demand logic and there is an element of truth in it. However, there are some complicating factors that tend to make this strategy the least effective competitive strategy for business success.
- Low price means low profit margins, which can lead to poor cashflow and operating just above breakeven level (if the costing is accurate). This makes it difficult to sustain long-term business growth.
- Low price may actually communicate a perception of low quality.
- Does low price necessarily attract more customers? In most markets, the companies that charge high prices seem to do quite well and appear to be more successful than those charging low prices.
- Low price strategy is only sustainable if you have a lower cost structure than your competitors. In most small businesses, this is rarely the case.
- Do customers value factors other than price in their buying decisions? Is price even the most important?
This issue highlights a lack of confidence in small business owners to value what they do and set their prices accordingly. The fear of losing customers is prevalent — and with good reason if those fears could be justified. In my experience, that fear is unreasonable when an effective strategic marketing approach is adopted.
One of the biggest weaknesses I see in most small and medium size businesses is in the area of strategic marketing. Most business owners are highly skilled in the technical aspect of what they do. That’s the hair dressing, graphic design, accountancy or whatever their business offers their customers. However, where they fall down is communicating the value of their products and services to their markets. The key word here is “value”.
The important question business strategists need to ask before setting a pricing strategy is, “What are we really selling?” Or, to put it another way, “What value are my customers really getting?” If you can’t find enough value to justify a higher price, create more value.
The only time when a customer can compare price effectively between one offering and another identical offering is when they are considering a commodity. According to Wikipedia, “A commodity is some good for which there is demand, but which is supplied without qualitative differentiation across a market.” In every other situation, you are offering a product or service with “qualitative differentiation” to your market. In other words, customers are normally unable to easily “compare apples with apples”.
Every product or service offered for sale is made up of a core product (service) plus additional elements that add value to the core product. These additional elements may include packaging, service elements, delivery elements and many other variables. It is the fact that these variable elements add value to the core product that enables qualitative differentiation, which means that what you provide to your market can be quite different and more valuable to your customers than the similar generic items your competitors provide. The ability to charge a higher price for these items comes down to their perceived value in the eyes of your customers.
How your customers perceive the value of your products or services is the result of how you communicate this value to them. This is where strategic marketing comes into play. It’s also where most SMEs unfortunately give away too much of their revenues and profits by inadequately communicating their value.
In the absence of any other value-based information, the decision to buy your product or service comes down to price. The reason why so many business owners think they operate in price-sensitive markets is that they fail to give their market any reasons to buy their products other than price-based information.
Strategic marketing is about:
- Discovering what elements in addition to the core product your customers value and are willing to pay a higher price for.
- Then building that value into your augmented product.
- Then communicating that value to them in a way that differentiates you and your products (services) to your market while providing a compelling reason to buy from you.
When you do that, you will find that price is not so dominant in your competitive thinking, other than to find out how high you can push it.
Photo: Tiago Ribeiro