I recently went to renew my desktop antivirus following a series of pop-up alerts that my software license was ending. The offer was to renew it for $79.99 a year, but I routinely look at Amazon before buying anything to establish the market price. When I saw that they sold the same product for $21.95, I called the company to find out if they could match the price.
They claimed it was not the same product—it looked like it from the photo and description! Then they offered me $20 off the $79.99 price. This seemed silly. If Amazon can sell their product for $21.95, why can’t the company? I also reasoned that this company was using a strategy of offering a lower price to new customers and a higher price to existing customers. In a transparent pricing world, this is never a good trend.
Before the internet, there were many distributors that could mark up prices based on geography or a specific industry channel. Consumers had no choice but to buy from them at the set price. Now, most products start out as a commodity.
If the consumer can shop elsewhere for a better price for the exact same product, they will. Furthermore, the price of any product has to be the same throughout the distribution channel for the company to keep its credibility. Unfortunately, this does create more competition. It also puts pressure on lowering the price, which will reduce profitability.
So, how does a small business keep prices competitive while remaining profitable?
1. Don’t Make Products That Can Be Commodified
A commodity is an interchangeable product that consumers can buy anywhere from many different sources. One brand or type of product can easily be substituted for another. This happens increasingly in consumer electronics, where customers shop for the best price among similar brands.
With big box stores and super internet sites like Amazon, it is impossible to compete and make a profit. Selling commodities are a race to the bottom, where all you find is the lowest price and the least profit. Small businesses should not enter this contest.
2. Add Value to the Sale
Consumers will always pay more for any perceived value. Beer served at a popular bar can be sold for more because the atmosphere is the added value. Customers buying a gas grill or flat screen TV will pay more if the company delivers and sets it up.
City Soles is a retail and online shoe boutique in Chicago that has a compliment guarantee; the customer can return the shoes at any time if they don’t get complimented on them. This is added value, since many times at other retailers, shoes are not returnable if they are worn. In a small business, think about what other solutions the customers want besides the product they are buying right now, and add that to the value proposition before the sale.
3. Sell Less for More
Remember, it’s the profit margin that contributes to the bottom line not the sales number. If given a choice between high sales and high profit, choose to sell less for more money! As a small business, forget about competing with Walmart. Stake out the territory of high value at a high price.
Fewer yet more profitable customers will be easier to service, and they will more likely stay loyal to your business, which increases their lifetime value. High margins and customer loyalty also reduce the company’s customer acquisition costs. Set up the profit and loss statement by class in QuickBooks to review customer profitability.
4. Specialize in One Thing
Have a rock solid brand promise for solving one problem for customers very well. A business that is everything to all people is not significant to anyone. A company may not have the widest selection, but what if they offer pre-sales or post-sales advice to make sure the customer can get the most out of the product?
Help the consumer make the best choice and they are more likely to buy from your company. A business needs to decide what they do better than anyone else, and then take action to back it up.
5. A Distribution Channel That Can Be Supported
If a company is going to sell a product through a broad distribution channel, sell the same product directly for the same price. The idea is that those channels can reach customers that the company will not be able to directly.