Monday, December 1, 2008

“There's a crisis".... should I Iower my prices?

Before even thinking of lowering your prices, take a few moments and educate yourself on the basics of positioning. Everybody heard about it, everybody has an idea about what it is but very few people actually know how crucial it is for the success of your business as a small business owner. Unfortunately for most small business owners, the whole concept of having a better product selling for cheaper isn't always the answer to attract good business. See, there's a big game of perception out there that you have to study and understand before putting a price tag on your service or product.

I remember a few years ago, my firm and I tried to help a client in the fitness equipment industry. He was ill by what I call the “SBOR, The small business owner reflex” or syndrome in some cases. He had an edge over its competition; he was more flexible, had less overhead and a better product he was selling for half price. In theory that should have done the trick right? WRONG!!!!! He was struggling.

See for every product, has a psychological price tag attached to it. This price tag will determine how we perceive a product and to what category it belongs to; entry level, intermediate or high end. When you introduce a product to the market, there’s a few thing you need to take into consideration.

Before anything if you didn’t do it yet, please do some research and know where you belong in the market. A price isn’t simply, “I have a product, it costs xyz to make, I can sell it for whatever so let’s do it and we’ll be rich!” Determining where you belong in the market is a price VS quality issue and has very little to do with your true cost (from a perception point of view). Here is a simple tool that will help you figuring where you belong. Use the chart above by positioning your competitors using price VS quality comparison and then yourself and sip on it for a moment.

In a lot of cases, that simple exercise was enough to pin point why some people had a hard time to penetrate a market. If your price is too low or too high considering the quality of your offer compared to the rest of the market, you will end up creating disappointment in the mind of your consumer because you won't be in line their expectations.

Use the simple but yet universal “Ketchup” analogy… it works every time. Study your own buying habits, everybody is human and we all shop the same way. Let’s say you need ketchup because you are having a barbecue for Sunday Night Football, you rush to the local grocery store, get to the condiment aisle and locate the bottle of ketchup Heinz. Tag price is $2.99, you grab it and then you are having a second thought because (you are on a budget). You browse around to see if there would be anything cheaper and find a low end brand selling for $0.99. The packaging looks awfully cheap, from a name brand you never heard of and you’re thinking: “There is no way that stuff can be the same as Ketchup because there is too much of a difference (and you are probably right). Disappointed, you browse some more and find the store’s home brand selling for $2.15. You grab it; compare bottles, label, ingredients, size and everything looks pretty much the same as ketchup (your reference for quality tomato sauce). In your mind, it makes sense to get an equally valuable product for $0.84 cheaper since you don’t have to pay for the brand name. The difference is significant enough for you to change your behavior and consider this alternative but not outrageous so your product gives the wrong perception and keep you from making the sale.

Still Skeptic?
Here's another example, let's pretend we are back in 1989 and Toyota is coming on the market with a car that is exactly the same as a Mercedes but costs only $35,000. Would you believe it? Maybe at the first glance, you might have say yeaaah duhhhh! But then, you would probably had a second thought telling yourself “wait a minute, Mercedes cost at least xyz so how in the world am I gonna have an equal valued product for so cheap… and plus it has the tag Toyota. Toyota makes great cars but it surly doesn’t compare to Mercedes, at least the feel wouldn't be the same”. Now let’s say Toyota introduces a luxury line of vehicles calles Lexus. It’s supposed to be as refined as Mercedes but since the line is less known, it sells for $10,000 less. Now it makes perfect sense right? The “Ketchup” analogy, works every time, guess how Korean cars were able to make it in North America.

My point
Belong at the right place. If you need to be cheaper, be it but maybe not that cheap. Find what will be significant without affecting your brand image. If you have to go higher, be also careful to stay in line with customers expectations.

David Morin
Brand Artist

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