What Business Owners Don’t Know About Price
What business owners don’t know about price would fill a shelf full of books.
1. For starters, they do not understand how elastic price is.
Only a small percentage of buyers (of anything) base their decisions solely on getting the cheapest price. If most did, you’d see more Yugos on the road than any other car.
I had a client in the business of hooking up divorced men with foreign women longing to be American brides. At my urging, he raised the fee for his service from $395 to $3,995 in one leap – and the same percentage of prospects continued to buy. They “stretched” with the price.
2. They do not understand that different people buy at different price levels.
Yes, there is a Wal-Mart customer – probably in every category of retail sales. But there is also a Neiman Marcus customer. You can get a steak dinner at Denny’s and you can get a steak dinner at Morton’s. You can sleep at a Marriott or at a Ritz-Carlton. In other words, there are many customers for whom price is low on the totem pole. It’s up to you to pick your target market.
3. They make a misguided attempt to compete on price.
If you can’t be THE cheapest, there’s no benefit in being almost the cheapest. Find another way to compete.
A client of mine who consults with the restaurant industry told me about a gourmet pizza take-out and delivery shop that he’s been working with. They’re in a small city, where they compete with 127 other pizzerias. 127! They have the highest prices of all of them, they do no 2-for-1 deals – and yet they doubled their sales and more than doubled their profits last year. Key word: Gourmet.
4. They pay too much attention to industry norms.
A lot of businesspeople look at what others are charging, and pick something between the high and the low. Pfui! Problem is, everybody else has arrived at their prices by going through the same foolish process – and it gets dumber over time. Understand that most selling occurs in a vacuum. If yours doesn’t, you should alter your entire approach.
There’s “price,” and then there’s “presentation of price.” The way to package and deliver what you sell should be structured differently from the way everybody else does it, so you can price it differently and make direct comparison impossible.
5. They live in fear – and any business decision made out of fear is a bad decision.
Out of fear, most business owners needlessly under-price, raise prices too little too late, and ignore opportunities to sell premium-priced versions of their products and services. Price paid is a result of target market selected, value built, value proposition presented, salesmanship, credibility, celebrity, brand, buying experience, and many other factors. It actually has very little to do with objectively measured intrinsic value. If it did, diamonds would command no more than glass or coal. Because you can control and manipulate all the non-intrinsic factors, you should approach price courageously and creatively. Build your courage by making yourself very aware of the goods and services your prospects spend money on, and how much they spend.
I work with a cosmetic dentist who routinely gives prospective patients estimates of $40,000 to $70,000 for work they want to have done – and he enjoys an 80%+ acceptance rate. I think he’s a pretty good dentist. But I seriously doubt that he’s 400% better than his competitor down the street … even though his fees are 400% higher.
This difference between intrinsic value and perceived value exists in every business, industry, and profession. There’s always somebody successfully selling a product or service at a price that’s dramatically higher than everyone else’s… even though the quality being delivered may be only slightly (if at all) better. You can do it too. No matter what your product/service is intrinsically worth, your prospect will pay a premium for it if he perceives it to be worth more than all the others he can choose from.