Put your prices up, you must be joking?

Wednesday 01 May 2013

Last month I described the relationship between profit, price and sales volumes and suggested that reducing prices to gain market share was a more risky strategy than putting prices up and differentiating your service in the current climate.

All business owners know that someone else could do what they do more cheaply, and worse than they do it; and that price is not the only consideration.

In fact, all the research I’ve seen on value proposition factors shows that whilst price is a factor, it comes much lower down the list than you would expect.

Logically then, where a customer is choosing solely on price between competitors, it must be because they do not value, or potentially do not fully understand, the benefits of the higher price offering enough to pay more for it.

This chart shows increasing uniqueness of a product vertically and increasing customer value horizontally.

In the top left box the product is unique but of little value. In the bottom left box the product is not unique and of no value! Ouch!

In the bottom right box the product is of value but not unique so price is the discriminating factor. Finally in the top right box it’s unique and of value, so price becomes less important.

It is possible to differentiate any product or service. The difficult bit is identifying what customers really value, and whether there is a sufficient market for the differentiated product.

Surprising examples are companies which charge a much higher price for a share on the stock exchange when it comes in a nice frame, as a gift wrapped present; or the commodity traders who have different prices for exactly the same product, but differentiate by having different delivery speed options.

The point is however, that these small tweaks create uniqueness. Customers can choose if they value those add-ons enough to pay more for them.

So how can you go about differentiating your offer? There are only four areas where you can - quality, speed, risk and price.

Quality

Actually, it’s the customer’s perception of quality. You may have the best materials or team but if they don’t know about it then it doesn’t matter. Often just better communication with customers can make a massive difference.

Speed

We are all increasingly impatient and, all other things being equal, anyone who can deliver faster is going to win business.

Risk

People hate making mistakes and always worry to some degree about using new suppliers. That’s why your best source of business is often repeat business. Reducing risk by offering money-back guarantees or committing to customer service levels will win more business.

Price

And finally, if you can’t do any of those things then you can be the cheapest and work harder for the same profit! A good strategy only if you can afford to do it, and force the competition to close, but not otherwise.

So, always remember your value proposition!