“Better quality products and services always attract a better caliber of customer.”
Other than a discount retail store owner, most of us would agree that quality beats quantity every time. And as a small business owner, your time is better served producing quality products for customers who appreciate value than those who buy crap just to save a few bucks.
In my area of expertise, I find working with customers who appreciate and understand the value of online marketing is rare. I’d rather have only 10 customers who have actually thought about marketing as a necessity for their business, have allocated a serious annual budget, and let the marketing experts do their job as opposed to 100 or even 200 who fight you on every decision or suggestion (as if they know better) or rarely ever want to spend a dime but constantly complain that their online presence isn’t doing anything for their business. Wow, that was a long sentence but true! Customers who see value are not easy to come by but worth the effort ten fold.
Here are some key points to consider in order to avoid quantity over quality when establishing pricing for your small business.
Why Under Pricing Hurts Your Business
Many businesses in desperation to sign customers or get sales will drastically reduce their prices. In their mind, they’ll just make it up later with the sheer number of customers, or perhaps get them to sign on for the lower “introductory” price and increase it later.
In both instances it is a slippery slope.
While the concept of having the same product sold to 200 customers all paying $50 or 50 customers paying $200 will net the same thing, they are very different.
Let me take a step back…
For any of you who have read other articles of mine you know that in the past I’ve been a big advocate of diversifying your service offerings and spreading revenue out among customers. I still genuinely hold that to be true. That can still be done with a smaller group of customers.
And I don’t really care how this makes you feel, but I have a confession to make… I’m in business to make money and help people in the process. What a concept!
The top three reasons I much prefer working with the smaller 50 customer group when it comes to marketing:
- They are spenders and they understand that quality and establishing a powerful, meaningful presence cannot be done without a considerable effort.
- They are risk takers and appreciate that you have to play to win.
- They are willing to invest in something they believe in and already see there is far greater value which comes from quality solutions rather than the group who is only paying $50 just to say money and go through the motions.
What do you think will happen when you try to get the 200 customers to spend $100? Probably half would leave.
They bought the bargain deal and there is no way they will be okay with the price doubling. However, if you go after the quality group of 50 customers, you could easily add $50 to the price and the greater majority if not all would probably stay put. Is this speculative and subjective? Absolutely! But based on past customer behavior I would say I’m entitled to make these assumptions because in my case they are correct, in at least 9 out of 10 cases.
“The point here is know your customer.”
If you understand who they are, what they like, and how they feel about your products (or similar products) then you can figure out a price that works for both of you.
How to Avoid Under Pricing
When avoiding quantity over quality with your products and establishing a better pricing model, always look at your competitors. Unless you see their costs as inflated or perhaps they have some added expenses (that you don’t have to incur) that are pushing up their price, avoid pricing any lower than them.
For example if an established brand is offering their product for $100 and you come into the market at $100 people will just look at you the same as them. You are just another spin off and why buy from you when they can buy from the well-known brand for the same price?
“If ‘no frills’ cost the same as the major brand do you really think anyone would buy generic?”
If you charge less, people will assume your product is not as good. Especially if you are new to the market. Without brand collateral and authority people will assume it’s an inferior product if you try to undercut your competitors.
Assuming you have a high quality product which is comparable to other competitors, if you price your product higher but reasonable, you will be in a much better spot. Here are three reasons why.
#1 You Keep Cheap, Uninspired Customers at Bay
By remaining competitive, you are not going after the discount/deal chasers who don’t care who they buy from. Those customers only want the cheapest price they can find.There is no brand loyalty there. Do not kid yourself into thinking that customers who buy from you because it’s cheaper hold any sense of obligation to continue working with you in the future. They will shop around again next time and if you do not remain the most or one of the most affordable options, they will leave… guaranteed.
Does every business have the luxury to cherry pick customers?
No. Depending on the industry you are in, you may be stuck with what you’ve got. But in most cases, developing a stronger marketing strategy which targets better customers can help you dictate the terms and pricing much more than if you rely on lower pricing being the only motivating factor to buying from you as opposed to a competitor.
#2 Pricing Higher Can Suggest Your Product is Better
Your price tells people that your product is as good, if not better than your competitors (even the major brand), if you price higher. The catch here, you had better make sure that it is! Nothing will crush sales faster than an expensive knock-off that does a half-ass job while charging more than the well-known brand name. Also keep in mind who your target audience is. Even if your product is only as good but not better than a major store brand, it might still have a great appeal at a higher price because its not mass produced.
For example, I can buy “organic raw honey” from a supermarket like Whole Foods or Trader Joe’s. Or, I can buy it direct from the local farmers who will charge more. Essentially it’s the same product. There is no added features or benefits from the major brand other than the fact it’s more convenient. However, when I buy local I know it’s super fresh, the money stays local, and I know the money I pay is going directly into the farmer’s pocket. So in a scenario like this, I prefer to spend more for essentially the same thing because the price I pay is only a portion of what makes me feel good about the purchase.
Many small businesses are in similar situations where customers may buy from them because of the personal touch or accessibility if something goes wrong or they need help. Small businesses often do not charge extra for those types of customer service benefits. It’s just an added perk of doing business with a company who does not have thousands of customers. So while they might pay the same or even higher than a major store brand, the small business approach and appeal may far outweigh the brand name influence.
Assess your own business and determine if this may apply when pricing versus a larger competitor.
#3 Eliminate Defensive Strategies
When you price too low or give massive incentives just to sign up, you literally back your business into a corner. You’re immediately up against the ropes and have to fight your way back to A) justify that your product or service is worth more than the initial cost and B) that even with a higher cost, sticking with your company versus finding a competitive alternative is a better option.
You also are forced to take on a far greater number of customers just to make the same profit margin. And, anyone who has been runnning a business for a while knows that more customers doesnt just mean more profit, but more work to keep each of those customers happy. More customers paying less, always leads to a much slimmer profit margin. And overtime I dont think there is any way to keep that going and keep the business afloat. I believe whole-heartedly this is a recipe for disaster.
Try to never put your business in a position of disadvantage where you immediately are on the defensive or have to “dig out” to balance the scales again.
Customer’s love deals. They love the idea that they are saving money and are compelled to spend when the opportunity to reap the benefits of those savings is short term.
Have you ever shopped at Kohl’s? Just about everything in the store is 40-60% off. The first few times you shop there it seems too good to be true. But after a few trips you realize there is always a ridiculous sale with huge discounts. The sale just ends up feeling like the regular price so you really are not “Saving.” Even large online retailers such as Amazon you see this often where the inventory count on items is very low (i.e. “only 1 remaining” “only two left in stock” etc).
This false sense of urgency gives way to a desensitization of what is truly a worthwhile deal. That is the problem with discounts and selling for less all the time. You must continue to do so or people will go elsewhere. And because deals are so common it really has to be a massive deal for most consumers to even bite.
How long could that possibly be sustainable? What does that say about the quality of products or services you provide?
So stick to your guns, stay competitive, and charge more.
If you regularly charge more that also opens the door for you to develop on-going sales and discounts for limited periods of time which will entice consumers to buy and buy soon before the deal is over. Even selling for less in this scenario will still be profitable.
You also have the flexibility at the higher price to continue increasing the price overtime because you are not worried about having the cheapest product in town or the most frugal of customers.
“Remember offer quality products that offer great value at a reasonable price and you will be able to control the market.”
This article is part of a 7 part series I’ve put together to help you effectively price small business services:
- Getting Rid of Limiting Beliefs About Money
- Creating a True Cost Analysis of Your Business
- Avoiding the Pricing Push (overpricing)
- Avoiding the Pull to Cheapen Your Worth (underpricing)
- Pros and Cons of Time-Based Pricing
- Pros and Cons of Value-Based Pricing
- Monitoring & Grow While Maintaining Pricing