Lower prices. Aargh! Yes, these days there’s constant pressure to reduce prices, right? For many small businesses, this is the only tactic they have to win business. Are you playing this game?
Lowering your selling price is the easiest response to being challenged in the market, or challenged directly by a client. It appeases customers immediately, but at what cost, and for how long?
As a business owner, do you feel that you must de-value your product or service in order to win business?
And if a customer is paying you only because you’ve lowered your price, how long until they jump to the next provider that has a lower price than you? When will they ask you to lower your price again?
Avoiding the price trap
The first critical realisation is that you cannot sell to everyone. No matter how much you lower your selling price, it will always be too expensive for someone. So where do you stop? How low do you go?
Second, there’ll always be someone cheaper. Globalisation has made sure of that. Its darn expensive to do business in Australia, there’s no way we can compete on price with the India’s and China’s of the world.
Thirdly, what is your business model? Is it your goal to service a large proportion of the market? Do you aim to be low-cost / high-volume? Or do you target customers seeking a premium product or service?
With these three things in mind, does discounting and ever-lower pricing have a place in your business strategy?
The $400 meal
People are willing to pay for the value they perceive to be getting. What value are you adding? From hotels, to cars, hair-cuts to restaurant meals, think about the price variation across the different offerings and what the perceived value might be.
Hong Kong is one of my favourite cities. I love the cheap back-alley shacks where you can have a bowl of noodles at less than $5 a pop. At the same time, I’ve happily paid over $400 for dinner at one of the high-end hotel restaurants.
Both meals satisfied my hunger, but I remember the $400 meal with fondness, because of the atmosphere, the views, the quality of the food, the fact that it was something special, the whole experience.
Where does your offering sit? If its at the $5 end, then go ahead, feed the masses. But be warned, to survive, you’ll need to speak directly to the masses. You’ll also need super low overheads and highly efficient operations…
But if you’re up towards the $400 end, are you being paid what you should be? Do you see these top-end restaurants lowering their prices because people say they’re too expensive? Of course not. Because they know that there’s people out there willing to pay, and they know what they offer to those people.
What’s your value proposition?
Value is a fleeting concept, and its different for each and every individual. Its therefore underpinned by your customers and how well you satisfy their needs, solve their problems and how you make them feel.
Value is NOT the ingredients you use, or the qualifications that you have. Its not about you…
Understanding your Value Proposition starts with knowing who your customer is. What are they trying to achieve, what problems do they have and what can they gain from your offering?
In many cases, price is not a key factor in purchasing decisions (depending on the situation of course). Think uniqueness, positioning, quality, service, reputation, these are all qualities that the right customer will value.
Defining your Value Proposition is key for any business plan and is one of the 9 components of the Business Model Canvas that I use to help businesses understand their core business model and offering.
Stick to your guns
Understand your value proposition, who your customers are and why they come to you.
Then you can stand by your pricing and business strategy.
Remember, you can’t sell to everyone. Service those that get the most value from what you offer, and you may never have to compete on price again!
This commentary is general. Any any advice for your business would take in your specific needs and situation. If you’d like to discuss how you can save time, increase profits and take control, feel free to book a free initial consultation with our Chartered Accountant and Virtual CFO Andrew Terlich here.