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Cheaper is not Better
Deciding if you want to be the cheapest
Recently, I overheard a conversation of two men at a restaurant. They mentioned a particular store they shopped in. They were complimentary about the location, the product selection, and even mentioned how they enjoyed using the products they purchased in the store.
The discussion turned to their desire to have a business which would be like the store they enjoy. However, at this point one of these prospective partners said, "I know we could sell it for less".
While having been a part of retail for the past 25 years, this is probably the biggest part of the industry I just don't understand. There are two men who find a part of the industry they enjoy and decide they want to invest money in. Why would they see a retailer they like and then decide they could, or should, sell something for less money?
Even if they were going to put their shop across the street from the competition, why would they want to have the cheapest price? There is no logic in deciding to compete with another store based on price. This writer's father drove this point home repeatedly as I was growing up. I think his comment was, "Any fool can sell something for less".
During a seminar produced by this writer, one retailer, who clearly understands the concept of business was heard to say, "If you gain a customer's business because of your prices, then you will also lose that customer because of your prices".
While some may think the key to getting a customer's business is having better prices, experience has shown the most profitable businesses have been those who have found a way to build a better mousetrap. In other words, they have appealed to customers whose main concern is not price, or they have appealed to a customer's feel for value.
When a customer is deciding to make a purchase, they calculate, some unknowingly, whether or not there is a value present. The customer begins by determining the quality of the product or service they are looking at. They consider the service the merchant is providing, and add to this the information they are receiving. The fourth factor in the equation is the price of the product. These four ingredients: quality, service, information, and price are added together to determine if there is sufficient value to justify the price.
The secret to the successful merchant is to begin by increasing the information and service. They may be able to increase the quality of the product by showing a different brand than the customer saw at another merchant. With these ingredients in place, they are unable to price shop the merchant against the chain store or big box store.
Your business has many advantages that you can, and should, take advantage of. Unfortunately, we don't realize we have them. An example is the carpet store which is located in an out parcel from one of the big box stores. With large signs they proclaim, "Cheaper prices than our next door neighbor". Instead of this scheme, this retailer could promote themselves as having a larger inventory, or selection. Surely, in addition to having a location which is just as handy, he does not have long lines to check out at the register. You definitely do not have to walk across the large parking lot to get to their front door.
And the person selling carpet in the carpet store today is not the person who was selling paint or lumber last week. Hopefully, the staff of the carpet store is not only better educated about the products and services, but has the opportunity to know customers on a first name basis. This logic of "cheaper is better", has not been reserved only for retailers. Look at manufacturers and wholesalers, and you will still find a substantial number who appeal to customers with a marketing scheme to promote, "New, lower prices".
There are however, several manufacturers who are finding out that there is a growing market that is very receptive to a different product. The Gillette company unveiled a new razor named the Mach3. Of course, it arrived on the scene with a lot of hoopla and advertising. The promotion does not talk about pricing as the new item sells for 50% more than Gillette's previous most expensive razor. The sales pitch appeals to a smoother shave. The Mach3 is now the number one razor in the country.
Similarly, Colgate has a new toothpaste called Total which is 25% above the price of mainstream brands. It is now the number one toothpaste with a market share of 10%. And while we are in the mouth, Oral B's new Cross Action tooth brush sells for 50% more than other top line toothbrushes.
There are several others whose cheaper is not better marketing is working very well for them. Dr. Scholl's has a new Dynastep which sells for twice the price of previous inserts and has commanded 29% of the market. Maytag has introduced their Neptune washer, and Sony has their Wega flat screen television.
While competing on price alone is hard to do and can cause a business to be marginally profitable, the success of these manufacturers suggests there may often be an alternative way. During a seminar at a trade show two years ago, this writer heard one dealer complain about his inability to compete with chain stores in his area on several lines of guns. Another retailer suggested the first retailer should add other lines in which he could establish a higher quality with the customer.
The response of the first retailer was to say that customers were not asking for these other lines. What he failed to see was, just like the carpet dealer, he had many advantages. Unfortunately, he failed to utilize them. The ideal situation would be to have the gun which is at the chain store, and at the same price. But when the retailer is talking with the customer he could show them the differences in quality in an effort to sell the more profitable item.
Take the time to sit down and list the twenty advantages your business has over the chain store or big box store. What if you say, "I can't think of twenty advantages"? Then if you don't know your advantages, your customer does not know them either.
When a retailer is unable to find his advantages, then he is relegated to competing on price alone. And that is a dangerous and very unprofitable situation. Cheaper is not better.