Tag Archives: price wars

Why selling on price is a bad thing (and why differentiation is a good thing)

Last year Apple revealed their profits had increased by 37% to $18billion.
Is this because they are the cheapest?  Far from it.

The new iPhone 6 is twice the price of other companys’ phones. Xiaomi’s Mi3 costs $320 compared with Apple’s iPhone 6 retailing at $649. That’s not to say that Xiaomi aren’t having great success – they are, but Apple can still sell its product successfully at that price point.

A common argument used by our clients is that they need to compete on cost. They feel they have to cut their prices to win business. At The Chameleon Guide we strongly encourage our clients to resist selling on price.

Here’s a cautionary tale on trying to win business based on cutting prices. A cupcake maker agreed a deal with Groupon (one of the discount voucher sites) and hadn’t done her sums properly. She was tied in to making up to 102,000 cupcakes as part of her offer at a 75% discount off her normal prices (and when she normally only made 100 cakes a month). She had to get in 25 agency staff to help her fulfil the deal, failed to deliver a good result to many and made a loss of £2.50 per box of 12 cupcakes.  That’s 8,500 boxes of cupcakes at £2.50 loss per box, totaling an overall loss of £21,250. She nearly went under.

5 good reasons not to sell on price

  1. It’s an easy thing to do and easy to copy, so your competitors can simply drop their prices to undercut yours
  2. You end up in a price war. Tesco’s profits have suffered from trying to compete with Aldi and Lidl
  3. Unless you have economies of scale allowing you to offer your product at the cheap end, it’s not really a sales strategy because you won’t be the cheapest
  4. You will be perceived as cheap and cheerful or worse. If that’s your strategy, go for it, but there is usually a suspicion that your product is likely to be of poor quality. You may get a sale, but if the product actually is poor quality, people are unlikely to buy from you again.
  5. For smaller companies it’s not a sustainable strategy – it won’t give you a long term competitive advantageGilbert cartoon on price

If you are going to reduce your prices for a one off push for example, make sure you do the sums.

Here are a couple of examples of the impact on profit reducing your prices may have. I’ve adapted the examples from this article

Example one – profit from selling the same number of products at a discounted price

Normal price Discounted price
Selling Price per item £100 £90
Cost per item £80 £80
Numbers sold 50 50
Total revenue £5000 £4,500
Total cost £4,000 £4,000
Profit £1000 £500

In this example, selling the same number of products at a 10% reduction has reduced the profit by half.

But of course you would be expecting there to be an increase in sales which would counteract the loss of profit.

Example two – How many more you need to sell to get the same profit as the non discounted price

Normal price Discounted price Discounted price
Selling Price per item £100 £90 £90
Cost per item £80 £80 £80
Numbers sold 50 60 100
Total revenue £5,000 £5,400 £9,000
Total cost £4,000 £4,800 £8,000
Profit £1,000 £600 £1,000

You would need to double the sales volume with a 10% discount in order to reach the same profit level as if you hadn’t introduced the discount.

This is a reasonably extreme example, because hopefully your costs wouldn’t be this high relative to the selling price. But it illustrates the point nicely.

There are of course times when it’s worth doing this. For example it’s end of line product and you’ve already broken even and you want to get rid of the stock. Or maybe there’s been a drop in the cost for some reason (drop in oil prices reducing transport costs for example) so you would be able to get a good margin still with the discounted price.

So, what does it look like when you don’t sell on price?

If we go back to look at Apple in a bit more detail…

They do not sell on price. They deem their products to be luxury items for which they can charge a premium.

This only works, because they do actually have a superior product. They create desirable products. The design quality is superb, it has an awesome brand, and it has the top Net Promoter Score in its industry across all three of its products. All three scores are in excess of 65 with their competitors trailing by at least 10 points. Given a cross industry average NPS of 15, this is an outstanding figure.

People who buy Apple do so because they buy into the Apple vision hence why each time a new version of a product comes out, there are massive queues to buy the new version, even if the old one is still functioning perfectly well.

Not all of us get the Apple phenomenon – I’m an Android/Windows lover through and through, but I can’t fail to be impressed with Apple. What’s not to be impressed about?

So how do you differentiate your product or service to attract buyers who will pay more for your product and stay loyal to you; buying from you time and again?

It’s about two things:

  • Finding your niche or point of differentiation
    and then
  • Finding the customers who value that niche or differentiation and will pay good money for it

7 differentiators

  1. Customer service
    As covered in a previous blog, many companies believe they offer superior customer service. Reality would say otherwise.
    But 8 out of 10 people said they would pay 25% more for a superior customer service (Source: Drum.com, 2013)
    So, if you can truly offer top customer service, you really will make a big difference and it will give you a sustainable competitive advantage because so few companies are able to deliver consistently high customer service. And it’s difficult to replicate.
  2. Unique product
    This is difficult to achieve unless you truly do have a unique product that no-one else has. But you may for example have the sole distribution UK rights to a product, or a pharmaceutical company brings out  a new wonder drug for a condition that will be on patent for anywhere between eight and 20 years before it can be replicated.
  3. Quality product
    Apple don’t make many things. But what they do make have superb design and work brilliantly. The number of colleagues and friends who tell me I should just give up get and AppleMac/Air/Whatever because ‘they just work’ is too many to be a coincidence.
    They are selling luxury.  But sell it in spades.
    Others such as Rolex not only sell luxury, but also exclusivity. How many of us could afford a minimum price tag of £3k for a bottom of the range Rolex?
    These products are about more than just quality – it’s a statement about the kind of person you are.
    Car sale
  4. Delivery/Reliability
    You deliver. On time, every time. This is of vital importance. A client provides safety products to the construction industry. And one of the key things their clients value is that they know if they place an order, it will be delivered in one piece at the timescale stated. And the clients are informed every step of the way. If a product isn’t available, they will be told, given alternatives and sometimes that even means pointing them in the direction of a competitor. Because it’s about delivering to the client.
  5. Information
    You are a source of knowledge about your product and act as advisers to your clients/customers. They will come to you because they know you will give them best advice, which sometimes means giving them something cheaper than they thought they might need because that’s what will work for them.
  6. Social/environmental
    Your products have a positive impact on the environment or supports social causes.
    Either directly or indirectly. For example you give x% of your profits to worthy causes, or you manufacture your products using recycled materials.
  7. Price
    Is a differentiator – but not for smaller companies (as covered above). This niche is strictly for the big boys who have purchasing power to keep their costs down so they can stack ‘em high and sell ‘em cheap.As a slight tangent – One could argue about the ethics/morals of this. For example, having clothes made offshore by piece workers who get paid subsistence wages and are forced to work in terrible conditions just so we can have cheap clothes. Who can forget the Rana Plaza disaster in Bangladesh in 2013 – when the building collapsed killing over 1,000 people and seriously injured a further 2,500. The added horror is that the employees said they didn’t want to go into the eight storey building because of the cracks that appeared, but were forced to go in or have their wages docked – not just for that day, but for the month. And it’s taking a lot of pressure to get some fashion houses to pay compensation…
  8. Add in your own…

What you need to do is identify from your top customers/clients what it is they value about you. It may be one or more of the above that are just what your customers want and are prepared to pay more for (other than the Price one obviously!). Having identified your magic ingredients and who your top customers are that pay for that recipe, you’re on your way. You now have a product/service offering that is based on value not price and you know what your perfect customers look like so you can go and find more of them.  Beware the – our product is for everyone – you’ll have a weak marketing message and are likely to end up falling between two stools. Far better to be brave, identify who those most valuable customers are and what they like about your product and laser focus on getting those customers.

And you never need to sell on price again.

If you’d like more information on how to identify your sustainable competitive advantage, drop me an email – karen@thechameleonguide.com

http://www.thechameleonguide.com