Norm Brodsky, Inc. magazine’s entrepreneurial columnist, speaks from experience. He’s one of the few business journalists who do so — most are experts or reporters — and consequently is one of the few I trust. He said something in a recent article that I want to discuss today. He was talking about a records-storage business he owned. He said he had entered the business with three great ideas — selling propositions that would make his business irresistible to customers.
All three strategies were clever, but all three failed. What he did to save his business is something I’ve been telling you to do: He cut his prices. Here’s what he had to say about it: “Now normally I don’t like competing on price. It’s a dangerous game. For openers, low price can connote poor quality. People wonder whether you can provide the benefits youre promising and, if so, for how long. Competitors will use your pricing against you, telling customers you’re fly-by-night and can’t survive.
In fact, you may not be able to survive if your gross margins are too thin. By the time you realize that, it may be too late. If customers have come to you only because you’re cheap, they’re likely to leave when you raise your prices. “On the other hand, I have no qualms about offering a lower price than my competitors do if my costs are lower as well. Not that I’d ever compete strictly on price — but I don’t mind using a lower price to get my foot in the door, provided I have the kind of gross margins I need to be successful.”
In the case Mr. Brodsky was talking about — warehousing old records and documents for businesses — he could reduce his prices while keeping good margins by moving his storage facilities into cheaper real estate. And when he did that, his business took off. There are plenty of good reasons to be afraid of lowering prices, but sometimes it is the only way to develop the market share, momentum, and cash flow your business needs to succeed. I’m not suggesting that you run a discount operation — that you should position your business as a bargain-basement operation. What I’m saying is that sometimes there is no other (or better) way to get a stalled business going than to give the market something it wants but at a cheaper price than the competition.
Price discounting is probably the best way to break into an existing market — but it should be used strategically and selectively. Usually, you’ll want to discount a product for which there is a very significant existing demand. That way, you’ll gain the maximum number of new customers. Then, you’ll want to cultivate those customers carefully — gradually “elevating” their buying habits in some sensible way as they develop their familiarity with your products.
You’ll want to make sure that in most ways — and especially in the most prominent ways — your “lead” product resembles or improves upon that of the competition. That way, the perception your customers have of you as a value giver will stay with them as they buy increasingly more expensive products from you.
If you have positioned your business on the high end and are concerned about damaging your reputation as a deluxe provider, you can create a separate company to generate the lead sales — or you can come up with a believable rationale for giving away the lead product at below market value. One suggestion: Simply tell your customers the truth — that you want their business and want to make them a very special offer to get it. You don’t have to like discounting. (Norm Brodsky, doesnt.) But if you don’t make it a part of your overall marketing strategy, you are rowing with one oar.[Ed. Note. Mark Morgan Ford was the creator of Early To Rise. In 2011, Mark retired from ETR and now writes the Palm Beach Letter. His advice, in our opinion, continues to get better and better with every essay, particularly in the controversial ones we have shared today. We encourage you to read everything you can that has been written by Mark.]