This is one of those myths that prompts many startups to create incorrect pricing structures right from the word Go. This in turn has a domino effect on the rest of the business, since it does not have the capability to produce the level of profit required to make the business viable. The fact of the matter is, having the lowest price does not always guarantee success. That is very far from the truth.
Think about it yourself, think about your personal purchasing decisions in the recent past. Were you presented with opportunities to purchase a lower priced product, but opted to go with something at a higher price? What were the reasons behind not choosing the lowest priced product?
Factors such as product design, quality of after sales service, purchasing experience, feedback from your peers, budgetary constraints and many other factors that culminate to form our final decision come to mind. All of these factors can be leveraged to provide a business with a substantial premium on it’s product/service as compared to the competition’s that is priced lower.
Lowering your price, and planning to make a profit by increasing sales volume, is in most cases not an optimal strategy. It position’s your business in the mind of the customer as a low cost vendor, along with the negative associations that come with this positioning. Think carefully about your pricing strategy. Remember, it is far easier to bring down prices rather than raise them in the future.
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This is very true. I think having the best brand is much more important than having the lowest price.
It also depends how your brand is positioned. If you take Wal Mart for example they have positioned themselves as being a provider of high quality products at lower prices. This goes back to re-reinforcing their brand.
However in most cases setting a lower price in the only hope of attracting a lot of buyers is not a sound long term strategy.
Thank you for the comment Shannon.
Very wise words Usman. I agree completely, however their is one caveat; if someone is offering a similar service for free you should avoid charging too much or completely move on.
I agree to a certain degree. I think expertise and experience plays a critical role in making that decision as well. In many cases someone with a lot less experience in a field can quote a much lower fee as compared to experts. Your rationale applies in areas where the market is highly commoditized and even the smallest of price differences have a large impact on your bottom line.
This is a great article. We agree that using a cost-plus approach is often the weakest approach for an entrepreneur. When I think about the things that I buy every day, it is only occasionally that I reach for the lowest-priced item in a category. What many forget is to truly factor in is the buyer’s benefits. Buyers don’t care what your cost is, they care what their benefit is and how it relates to the price they pay. We have more thoughts on pricing here: http://startupme.com/wordpress/blog/9-pricing-rules-for-entrepreneurs/.
Thank you Matt. That was a great article. Pricing is such an elusive element and one where a lot of first time entrepreneurs make mistakes of not doing enough research to finding out the correct level they should be pricing at.
Hope to see a lot more of you.