May 5th, 2009 @ 11:30 am
Scenario: You’ve got a product that that’s massively better than the competition AND costs you massively less to manufacture. Do you lower the price to reflect your lower costs? Or do you raise the price over the competition to reflect your product’s superiority? Please vote:
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payroll4sb
Often, when I am competing for business and my fee is ?massively? cheaper, some prospects take the ?you get what you pay for? attitude. In these economic times being cheaper may be good but I need to feed my children and pay my bills. We take the ?never sell on price, try to prove value?. I believe I heard Tom Hopkins once say ?Price is only an issue in the absence of value?. Add value, sell on value. If you sell on price, your competitor following right behind you will drop their price 5 - 10% and steal your new client.
Geoffrey James, Sales Machine
Re: comment 1
You haven't read the post carefully. According to the scenario, at this point, you have no competition that's capable of dropping their price to anywhere near your costs.
The main thing during a market disruption is to capture share and a customer base and be the person who quickly drives the obsolete vendors out of business.
Trying to milk the market for extra margin (by selling anywhere near the competition) is just going to keep the old competition alive long enough for your real competitors (your imitators) to have something to feed on.
If you don't move very aggressively, you could lose out to the future competitor who takes advantage of the same cost structures that you have.
Let me try to explain this with an exaggerated example. Suppose you created an automobile that cost $1000 to make and could go 100 miles on a gallon of gasoline. If you priced it at, say, $5,000, you'd drive every automobile manufacturer out of business almost immediately, assuming you could manufacture enough of them.
On the other hand, if you priced them at, say, $20,000, you'd make a lot of money on each sale, but you'd sell far fewer cars. Eventually another comparable car would enter the market and you'd be stuck competing for the new market as the old one collapsed.
In the first case, you end up with 95 percent of the market (now normalized at $5,000 per unit). In the second case, you end up with 33 percent of the market (also normalized at $5,000 per unit.) It's not even clear whether the extra margin that you'd make in the initial year (due to the higher price) would be greater than the margin you'd make selling more cars by completely destroying the old market by underpricing.
I could show you this on a spreadsheet, but I'm hoping that you'll see the point. In the singular case of actually owning a disruptive product, you're better off killing off the older competition as quickly as possible. It's not a typical situation, which is why it's counter-intuitive.
Geoffrey James, Sales Machine
More re: comment 2
You also missed the point that your product is clearly superior to the competitions, in which case there would be no "you get what you pay for" from prospects but only "WOW!"
To understand the logic of this, you need to think about products that are MASSIVELY better and MASSIVELY cheaper to make. They break the rules, which is why standard sales and pricing strategy doesn't apply.
Jake Stone
http://www.finnpower.com/ started out during late sixties on Finland's countryside in a garage by making metal washers out of sheet metal for bigger machinery manufacturers.
Owner soon noticed that the machine he used to make the washers could be significantly improved. He made some tuning and finally a complete prototype for new sheet metal press. Soon he "took over" the world of international sheet metal manufacturing by selling far better quality with lower prices than competition.
Competitors weren't able to cut the price so low that it would have deterred the market growth for the new product, because once the customer tried the new machine it was obvious that buying inferior machine would just lead to far less efficient manufacturing process. Hence customer would be leaving money to the table...
This resulted into a stellar growth, which now has subceded as competitors have closed the technological gap and pricing. Now the company faces normal market dynamics and can't provide that stunning value that they did before. Still a good company though.
jad67
Low cost is in the ownership of the seller.
High-value is in the mind of the buyer, but EVERY seller will claim to provide it, however genuine, and whatever their cost.
Any decision to abandon a unique low cost advantage in preference for a "me-too" high-value marketing contest is a strategic risk that I would need to be tremendously convinced of.
Who cares if others drop their prices in these conditions? They'll go into the ground - and you'll STILL make a profit.
elitetuner@...
If you are going after mass market as fast as you can it make sense to go after scale. But if you want to control the value of the product higher in the stack I would start at a premium price but make sure it demonstrates obvious superiority before reducing the price over time.
Most product gets commoditized after time so I would gradually lower the price to expand the reach as more competition give me a run to my product.
If the product is a true "disruption" to the market, I would still try to retain my brand value, think iPhone. Even though they lowered the price it is still more expensive than BlackBerry. BlackBerry had to do buy 1 get 1 free promotion via Verizon to outpace iPhone in Q1 of 2009. To me, they devalued their product and could run into the danger of what happened to Motorola's Razor phone.
Eric Tsai
eric@designdamage.com
kailani
You need to de-commoditize the product to be successful at a higher price.
I believe the fastest way to achieve that is to make the customer try it , luring him with an aggressive price.
Once the customer has perceived that extra value we claim to have and looks specifically for our product, then it may be the right time to adjust our price upwards.
sankum2000@...
I would recommend a "flanking strategy", i.e., come out with 2 versions of the product with slightly different features. Let's name it as A and C. Competitor has the product named B
Pricing of A = 115% of B
Pricing of C = 85 % pf B
This will straddle B and usurp the market share on both sides. With dwindling sales and little margins, competitor will not have enough money to invest in new product lines, while I continue to maximise margins, market share and do more product launches.
This will yield the desired objective, "to capture share and a customer base and be the person who quickly drives the obsolete vendors out of business. "
Canvys Visual
I believe you need to ask the question, "Do I have a sales force that can effectively sell "value"? or are they "order takers".
In addition, if this were a new product launch, I would come in lower than the competition only via a promotion, with a specific start and end. It could always be extended if necessary.
After the promotional period, the price would go to it's "normal" price. The result= gain marketshare and customers now know the product is massively better than the competition. They will continue to buy it, even after the promotional price has expired.
mikespur
You did not mention that the product was "new to the
market", you only said "you've got a product." This does make
a difference. Clearly, a new market-changing product and
manufacturing process should establish its OWN pricing, and
that should definitely be less than the competition in this
case. But there are existing products out there that fit this
bill, and changing their existing pricing strategy and justifying
it is a different story. Lowering prices has to be done
carefully: for every 10% you lower your prices, volume must
increase 15% just to make the same profit. The difference
here is that you are changing your fixed costs, not just
lowering prices.
ndlicht1
I am ingrained with sell value, not price. This answer took me by surprise as it did more than 55% of the respndents.
I'm wondering if once the price is set, will it stay low? Is this a one time sale to a customer that, once done, becomes part of their operation and can not be undone by a competitir? I'd be asking about that.
If it sets an industry bar then I can see the logic but, again, habit makes this lower price concept hard to accept. Yes I get it creating market dominance and a great profit margin UNTIL you have competition and you will.
Also, I understand window of opportunity and pricing to grab it but you seem to think that a competitor wont surface - they will. The "old " will retool and go after you on price.
I get the reasoning, espescially since you make more and grab a lions share but I'm wondering, could equal price could get the busness get the business and then leave room to drop as competition stps in?
Geoffrey James, Sales Machine
Re: Comment 9.
You raise an interesting question. Does the investment in a consultative sales force justify the additional revenue and profit that they'd presumably generate. A nice Excel problem.
Re: Comment 10.
Yes, there are some profitability calculations that need to be factored in. As well as the cost of ramping up manufacturing, which is not always the easiest thing to do. However, based upon the limited information that I provided, I still think that my strategy makes the most sense. Add additional conditions...well... not so much.
Janet Krenn
I think its interesting that very few in the poll agree with the "correct answer". (I was one who did not as well.)
It seems to me that if you have a superior product, you need raise your price at least as you're coming out of the gate. Especially if your product is based on new innovation (manufacturing or otherwise), you'll need to make back those R&D costs and make some money before copycats get into the market.
Does anyone have good reason why this line of thinking is false?
Geoffrey James, Sales Machine
Re: Cpmment 13
Truth to tell, it's kind of a trick question. Rule changing market disruptions are relative rare events. In almost every other case, you'd raise price to reflect higher value. Only logical, really, which is why most people went for that choice.
ddaly@...
THe questions can't be answered in isolation of a company's strategic objective and other resources:
If my objective market share, then I agree with the recommendation.
However, maybe I don't have the resources to market (to create demand), to manufacture enough, or to push through my distribution channel. There are many examples of small companies who have had chearper and better products but could not support a market share stragey with the necessary supporting resources.
Here's the first question to ask:
What's your primary strategic imperative (and you can only pick one)
1. Revenue
2. Profit, or
3. Market Share
This selection drives a lot of other decisions.
More on this and other stuff at www.s20n.com
Geoffrey James, Sales Machine
Re: Note 15
Ddaly is exactly right.
By the way folks, he's too modest to mention it, but "Ddaly" is actually Donal Daly, a real luminary in the sales training and sales research world. For some of his wit and wisdom, check out this post:
http://blogs.bnet.com/salesmachine/?p=1340
Geoffrey James
Geoffrey James has sold and written hundreds of features, articles and columns for national publications including Wired, Men's Health, Business 2.0, SellingPower, Brand World, Computer Gaming World, CIO, The New York Times and (of course) BNET. He is the author of seven books, including Business Wisdom of the Electronic Elite (translated into seven languages and selected by four book clubs), and The Tao of Programming (widely quoted on the Web as a "canonical book of... more »
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