Let’s talk about castles.
What do you need to build a castle?
- thick, unscalable walls
- places to withdraw your bridge
- places to drop hot oil, foul water, alligators, etc.
- a moat, for preference, and
- turrets, lots and lots of turrets
When it comes to making a product, the recipe is just the same. Only with a product, these fortifications have names like:
- Unique Sales Proposition
And so on. The goal is the same: prevent your competitors from breaching your castle and stealing your serfs.
You know, the stuff that makes you different from the other guys.
Stuff they can’t just copy.
In other words: anything but a low price.
Competing on Price: Fools Only
And so, the clever authors of Pricing with Confidence tell us, Low Price is a Dumb Tactic.
Price competition is a fool’s game because any fool can play it.
Yup, anybody can lower a price. Anybody can compete on price. They don’t have to build a castle first. They also don’t have to face the hot oil and/or angry fishwives.
When you lower your price, you stand out… for a moment.
Tomorrow, somebody else less competent, less skilled, can come in, undercut your price, and steal that position from you.
There’s no sustained advantage to be had through price competition.
…if you do win the order, your satisfaction is quickly undermined by the sneaking suspicion that what you have won is a Pyrrhic victory (another such victory and we are done for!).
That is the power of pricing: a bad price can transform a victory (woo! all those sales!) into a disaster (zomg, the overheads!).
In fact, the authors of Pricing with Confidence assert,
… weak competitors have an advantage in price competition because they’ve got little to lose and nothing else to leverage.
“Little to lose” and “nothing else to leverage” – not labels you want applied to your business, are they?
Why Price Low in the First Place?
- Fear & ignorance. You’re afraid of asking for money, so you think the thing to do is to ask for only a little. It feels safer.
- Everybody else does it. (See below)
- You want to grab a bigger slice of the marketshare pie. (See below)
Everybody Does It… Don’t They?
Our clients tell us, “We have no choice but to discount because our competitors are nuts.” In fact, the competitors just look like they are nuts because they have the same addiction. By the way, we always tell our clients, “Your competitors are saying the same thing about you, and for precisely the same reason.”
By now you are shaking your head. Of course, you think. It’s obvious now.
When one competitor cuts its prices, it’s exactly like when a customer says you charge too much. We talked about this last time:
When a customer says, “Your price is too high,” your instinct is to respond to it as if it were really a discussion about price. To keep talking about price.
But that instinct is wrong – wrong when it’s a customer conversation, and wrong when it’s a competitor’s action, too.
It’s not about price – it almost never really is. The trick is to remember that, and not get tricked by your lizard brain into reacting without question.
To Grab a Larger Market Share
So maybe you’re too worldly and cynical to price low out of fear or competition. But you’re still tempted. Your considered, logical reason to price low is: to increase market penetration. (Fuck yeah!)
There’s just one problem with this sexy, aggressive tactic:
Does it work?
That’s a question that rarely gets asked. And, as it turns out, it doesn’t:
Elastic markets are quite responsive to changes in price. Inelastic markets are not. Elasticity research tells us when price decreases are going to bring us more revenue.
Do you know if you’re in an elastic market, or an inelastic market? This is important, because it turns out they behave in completely different ways.
A market is only elastic if a lower price convinces more people, total to buy – from you, or anyone. It doesn’t count if a lower price convinces a person who’s already someone else’s customer to switch to you. Make sense?
Only price low if there’s a chance to capture sales that would never have otherwise happened, ever.
In fact, because of the effects of derived demand – remember, lower prices don’t increase total demand – penetration pricing is poison if you are competing in a mature market.
I wouldn’t go so far as to say that ebooks, screencasts, and web apps are mature markets just yet. They are still growing, and will continue to grow.
But they are based off mature markets. With ebooks & screencasts, there are direct corollaries to books and video training from before (and simple comparisons to live training as well).
With web-based software, the vast majority of your potential customers have already used or bought web-based software.
For customers who have not yet bought ebooks or subscribed to a web app, the hurdles are not cost or price, but a different way of looking at software & education.
If a person hates the idea of paying monthly for software he could “just buy at CompUSA,” no price will convince him otherwise. If a person thinks it’s morally wrong to pay for one person’s well-orchestrated “bits” instead for a 3lb paper book with 42 authors on the cover, it’s not the price that will sway her bias.
So let other people blaze trails with low prices and unsustainable overhead. And let them suffer the consequences.
What to do? The best response is to skim price for high margins at the top of the market and use a neutral pricing strategy for mainstream and low-end market segments.
Charge a higher price, earn more from fewer customers, and serve those few customers better with your limited resources (e.g. your time). Go for the margins, don’t go for broke.
Be like Apple: with 4% of the mobile phone market, they have nearly 50% of all profits.
That’s a great place to be.