The Race to the Bottom of the Pricing Barrel

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When thinking about pricing your merchandise or services you might be tempted to look around at your competitors and then price your stuff the lowest. You figure, this way, customers will choose your company and you’ll make tons of money. But is this strategy the best?

Breaking it down into the most simple terms, there are three ways to do business:

1) Sell a few items at a high price

This strategy works well for craftspeople. If you’re building custom cabinets in your workshop, hand-weaving rugs or making custom-fitted suits, you’re not selling to 10 customers per day. It takes awhile to create your product, so you’re limited in inventory.

So you’re selling to a much lower number of customers and you’re charging much more for your goods. Not everyone can afford your stuff and not everyone values your craftsmanship. But if enough people care about the quality you offer, you’ll make money.

2) Sell a lot of items at a very low price.

This strategy works for many businesses. Price your stuff the very lowest amongst your competitors and people will flock to your store. Of course, the only way to be able to price your stuff super low is to carry low-quality merchandise.

Think of Walmart, McDonald’s, Old Navy and the many dollar stores. No one expects the burger from McDonald’s to be gourmet quality; no one expects the sweater from Old Navy to last for 10 years. It’s cheap stuff, sold cheaply.

3) Sell a reasonable number of items at a reasonable price.

If you don’t want to be a high-end retailer and you don’t want to be equated with cheap stuff, this is where you want to be. Find decent-quality merchandise, price it fairly and identify a unique value proposition that will set you apart from your competitors.

Unique Value Proposition

Yes, it’s a “corporate-speak” kind of term. But behind the annoying phrase is a sound bit of marketing advice.

Pretend for a moment that your product/service pricing doesn’t matter at all. Now, figure out why customers should buy from you. That’s your “unique value proposition.” Here are a few examples:

Special Product

Joe has a retail store. He carries fair-trade imported clothing, textiles and rugs made in South America. His prices are slightly higher than that of the big-box stores, but still fall in the mid-range. His unique value proposition is that people can buy unique items while paying fair prices that don’t encourage sweat-shop practices.

A Special Space

Ann owns an ice cream shop. Her ice cream is nothing particularly special; she orders it from a large company that distributes ice cream all over the country. But Ann is set up with two large party rooms and loves to host birthday parties and other special events. Ann’s competitors are much smaller shops. So Ann’s unique value proposition is that hers is the ice cream shop that can host large parties.

Specialized Knowledge

Brad’s auto repair shop has been in business for twenty years. In addition to offering everyday maintenance items such as oil changes and brake pad replacement, Brad specializes in transmission repair and replacement. His employees are certified and receive ongoing training and education. Brad’s unique value proposition is that he has more knowledge about transmissions than the average auto shop.

Special Service

Mary’s travel agency competes with huge online companies. Her competitors’ customer service operations are overseas and customers have complained that they can’t understand the agents, or that they are using scripts that don’t allow for individualized attention. Mary’s company provides specialized customer service; her customer service agents are available 24/7 and they are located in her hometown. Her unique value proposition is that she is keeping jobs in her hometown and offering a positive customer service experience that is helpful to her clients.

Each of these businesses has plenty of competition. But by identifying one thing that they do differently, these business owners have distinguished themselves as better in some way.

Why being the low price leader is a bad idea.

There are several reasons that being the low price leader can really backfire.

  1. Your competitors can change their pricing to be lower than yours. Then you’ll have to lower your pricing. And so on and so on until no one is making any profit.
  2. At some point, you’ll have to find ways to lower the cost of your product in order to make a profit. You’ll have to diminish the quality of the raw materials, or find even cheaper labor. It’s a race to the bottom. Who can offer the crappiest stuff and pay overseas workers the lowest amount to make it?
  3. Your customers will quickly learn to play you against your competition. They’ll watch for you to lower your prices or hold another 75% off sale.
  4. Your customers will equate your business with junky merchandise. If you run a dollar store, that might be fine with you. Otherwise, aim for a slightly better reputation.

Avoid the race to the bottom of the pricing barrel. Offer customers a real reason to patronize your business. They’ll feel good about buying from you and you’ll feel good about providing goods or services that are worth buying.

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