Why Low Prices Suck

By on July 21, 2009

Give Me More Expensive StuffFollowing a discussion today with Ben Young of bwagy fame I want to focus on price.

How businesses price their products or services obviously has a large impact on how successful a business is.

So today I’m going to share a few thoughts on how to determine your pricing…

Your Price Is Too Low!

There aren’t many businesses that can’t raise their prices and still have lots of happy clients. Most of the concern of raising prices comes from your own hang-ups about price rather than the consumers. Plus there are ways to minimize price sensitivity in your clients that we’ll touch on in a second.

The Problem With Pricing Strategies

Business experts will teach you all kinds of formulas for determining your prices. The problem is most of these formulas rely on the costs of you delivering your product or service. They don’t take into account how much value you deliver your clients.

This forgets all about the golden rule of marketing and the only question consumers are ever interested in…

What’s In It For Me?

If I invent a machine that legally prints $1,000 notes but it only costs me $1 to make the machine… how many people are going to complain I’m charging them $10,000 for it?

The same applies to hourly rates. If you’re charging by the hour you’re not taking into account the value you’re delivering either. The best way to illustrate these points are through examples.

How To Sell A Bottle Of Water For $200

Sound impossible? Not really… just hang around in the desert and keep your eye out for lost travelers. A person who is literally dying of thirst will happily pay anything you ask to save their life.

The water hasn’t changed… all that’s changed is the need of the person and you’re able to increase your price astronomically. From about $2 to $200 is an increase of 100 times! By saving their life you’ve increased the value the water provides.

Sound Stupid? What Do You Think Bottled Water Is?

You pay about $2 for a bottle of water compared to drinking tap water. For simplicity let’s say tap water costs $0.02 a “bottle” still resulting in a 100 times increase in price. Now you can argue all about the quality of the water but let’s face it… it’s still water.

Bottled water has never given me any superpowers I’m aware of.

The same with different brands of water. How does one company charge a premium price? By increasing the perceived value of their water. Spring water from some natural park is going to sell for more than my tap water. And how do you know their water isn’t from the tap too?

Let’s Forget About Perceived Value For A Second

If that’s a little abstract and hard to swallow… let’s look at it another way. How about a graphic designer that charges $100 per hour because it’s the industry standard. For example, you could go to any graphic designer in town and they’d charge around the same price.

So the designer who designed the logo for a number of leading brands around town charges the same as the new design company who have little experience outside of university training. After all, they’re both selling a logo aren’t they? Well no, they’re really selling a memorable logo that will enhance and promote their client’s brand.

The value of having a great logo may increase sales for one company. There’s probably someone out there who specializes in testing different logos to see the effects on sales. The fact is the designer with more skill and experience should be offering greater value.

High Price = High Perceived Quality

We equate in our mind high price with high quality. After all, if you want the best you have to be willing to pay for it… right? So my question for you is if you believe you’re better than your competitors why would you charge the same amount?

If you have better customer service or a higher quality product then you shouldn’t be afraid of charging more for it. However, if you’re not the best at what you do (yet) then it might pay to get better before raising your prices. Just remember that how good you are is largely based on your own perception of yourself and your competitors.

The Benefits Of Higher Pricing

You always want to price at the higher end of the market. There are a few reasons for this:

  1. The clients will actually have money
  2. The clients are less price sensitive
  3. You can afford to provide a better service
  4. You can spend more money on marketing
  5. The higher end market is increasing (despite what the media tell you)

The Dangers Of Low Prices

On the flip-side if you have low prices you are clearly deciding you want to work with people with less money. Without getting into a debate about helping those less fortunate and greed you really don’t want to base your business on price. A few reasons are:

  1. The market is extremely price sensitive and unloyal
  2. There is a lot of competition
  3. There is always someone trying to undercut you
  4. Your cashflow is less forgiving if you make a mistake

A lot of businesses focus on price because that’s the only kind of marketing they understand and while some obtain a level of success… most die a painful death very quickly.

Learn From Low Price Success Stories

Let’s take two NZ institutions that based their marketing on low prices and were very successful: The Warehouse and Michael Hill Jeweller. Both started with very sales orientated marketing that emphasized lowest prices. However, if you look at their marketing now it’s very different.

Both now have much softer advertising attempting to show increased value to consumers. The Warehouse “Where everyone gets a bargain” slogan is no longer emphasized and different unique products have been introduced to raise perceived value such as designer clothes.

The amount of effort to reposition these companies in the consumers minds (and they’re not finished yet) has been enormous. Learn the lesson now and plan for premium prices… it’ll make life a lot easier for you.

Create Prices Based On Value 

The best way to determine your price is work out how much value you deliver to the client. If you’re marketing to businesses then how much money do you make (or save) them? If you’re marketing to consumers how important is what you offer?

Personally, I don’t care that my smile isn’t perfect but to a model her smile is critical. So should a dentist try to attract me or the model as a client? The value she places on her smile is a lot more and if you’re going to create the result she wants she’ll pay a lot more for it.

Back Up Your Prices With Good Marketing

When you price on value you also want to be able to explain and quantify the value you’re delivering. A consumer won’t realize why they should buy your fancy and expensive potato peeler until you describe how the design is more comfortable to hold, faster to use and easier on arthritis sufferers.

So make sure you can clearly explain the value you’re delivering and support it with every aspect of your marketing. You should already be focusing on benefits anyway… you just have to be more aware of price justification when you have premium prices.

What You Do Next

Write down a plan for increasing your prices then work out what pieces of the puzzle you’ll need to put in place first. You might want to start by just offering a premium version and see what the response is. Just remember the key to success is always focusing on the value you deliver.

Still Not Convinced?

Leave a comment if you have any questions or want feedback on your particular industry. It’s hard to cover all the angles of this concept in one blog post so feel free to help fill in the holes.

About Craig Dewe

Craig is the founder of Web Marketing Outlaws and has been doing internet marketing for over 13 years. He enjoys working on projects that help people improve their lives and grow their businesses.

6 Comments

  1. Paul Simister

    July 21, 2009 at 7:09 pm

    Excellent blog Craig on an essential area.

    Pricing is a fascinating area since it’s where business strategy, economics and marketing meet up with buyer psychology.

    Each of us is very attuned to making some kind of value for money assessment because we have to do it each time we go shopping.

    I tend to use about three examples.

    First I challenge people to tell me what they are wearing that is the cheapest generic item they could possibly have bought to help get them out of the “people only buy on price mindset”

    Second I talk about sliced bread. I’m not an expert but when I walk around a supermarket in the UK prices seem to vary from 30p to about £1.50 – a range of five times the cheapest price.

    Third generic over the counter drugs v branded drugs. In the UK they have to display the active ingredients on the packet so you can check and compare like for like but still people buy Nurofen, Anodin etc.

    Amazing really.

  2. Sheldon (Marketing Consultant, Tauranga)

    August 7, 2009 at 3:09 pm

    Another genius article Craig. Thoroughly enjoyable!

  3. Craig

    August 7, 2009 at 3:15 pm

    Thanks Sheldon, glad you enjoyed it.

  4. Pingback: Choosing a business model that actually makes money | Marketing Outlaw Hideout

  5. Patrick Curran

    October 18, 2009 at 6:34 pm

    A very interesting article Craig. I’m looking at increasing my prices to clients soon and I must admit I didn’t have any idea on how to do it. Your article opens up numerous ways to do it.

  6. Craig

    October 20, 2009 at 11:16 am

    Thanks Patrick… I’m here to help.

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