To effectively price your products and services, you have to choose one of three overall strategies: lowest price, best product or best total solution. Without committing to one of those, you will lose business or reduce profits. Here’s an analysis that will help you properly position your company.
1. Lowest Price (like JetBlue)
When you decide to offer the lowest price, you will always compete on price, which becomes the way your business is differentiated from competitors. Staking out this segment of the market is difficult. You have to continually work on lowering your internal expenses, from the costs of the goods you sell to your employees’ salaries to your office location. By controlling costs, you can pass the savings on to your customers.
Instead of making more money on a single sale or transaction, you make more money by increasing the number of sales. You reduce your customers’ resistance to buying from you by eliminating price as an obstacle. If all things are equal, why should anyone pay more?
An ideal example of this choice is Wal-Mart, which built a purchasing and logistics system that reduces all costs to deliver rock-bottom prices on everyday items. JetBlue Airways also committed to this strategy, with ultra-cheap fares, class-free seating and few passenger perks.
This isn’t something these companies do once in a while. It’s their strategy. And unless you can reduce costs enough to make price your advantage, this probably shouldn’t be your strategy.
2. Best Product (like Mercedes-Benz)
The second possibility is to provide a product, service or solution so much better than your competitors’ that people will pay a premium for it.
This strategy isn’t an easy choice either. First, you have to spend enormously on research and development to be the best. Second, you have to spend more on the materials that allow you to be the best. And third, you have to invest in the marketing necessary to bring your offering to the attention of people who would want it and might be able to afford it.
Unlike your competitors who compete on price, you intend to sell fewer units, but at a much higher margin. The superiority of your product, service or solution makes it easy for your target market to say yes.
Mercedes-Benz, known for its pricey vehicles, is an excellent example of a company that has made this choice. It uses the highest-quality parts available and always has greater technical specs than its competitors. The company spends enormously on design and user experience (for instance, Mercedes is researching driverless vehicles and recently put the first driverless delivery truck on the road; it will release driverless cars within the next seven years). The company spends lavishly on marketing to reinforce its quality-first image.
BMW, Lexus, Apple and Samsung are also good examples of the high-quality, high-price choice, and you could put Ritz-Carlton and Four Seasons hotels in this category, based on their services.
Companies using this choice of strategy always compete on being the clear leader.
3. Best Total Solution (like Westin)
The third alternative is to provide the best overall solution for your customers. You won’t have the absolute lowest prices or the very best product. Instead you come up with the right trade-offs to exactly meet your customer’s needs.
My house is located near a Kroger and a Super Wal-Mart. I know Wal-Mart has lower prices, but the store is massive, so it takes more time to pick up what I need. I’m not crazy about the shopping experience there—the aisles can be crowded, and the checkout lines can be long. Kroger is smaller and doesn’t sell anything in bulk, but I shop there because the experience is better, even though I know that I’ll pay somewhat more.
I love Ritz-Carlton hotels, but they’re really expensive. The Ritz probably has the nicest, best-decorated rooms—with big-screen televisions, walk-in showers and a fully stocked mini-bar. Ritz empowers employees to spend money to correct anything that isn’t right in order to protect its leadership reputation. Westin Hotels offer an experience that, while not quite the Ritz, is a cut above many other hotel chains. Westins have a modern look and feel—and they have the Heavenly Bed, which is so comfortable that an in-room brochure explains how guests can order it for their homes. To appeal to their most coveted customers, Westin Hotels deliver a solution that’s a major cut above lower-priced chains, yet with significant savings compared with the Ritz.
Kroger and Westin make trade-offs to stake out the position of best overall solution for their customers.
Why You Need to Choose
You’ll struggle to effectively price your offerings if you don’t settle on a single strategy. Straddling doesn’t work, and here’s why.
If you try to compete on price when that’s not your strategy, you’ll encounter this scenario: As you left a prospect’s office, a key decision-maker said, “We’d love to do business with you, but you need to sharpen your pencil. Your competitor has a much lower price.” You want this business, but if lowest price isn’t your strategy, you don’t price-match because you’d eliminate the profit you need to deliver the best product or best total solution. Your problem in landing this deal isn’t that your price is too high; it’s that you’ve failed to spell out the greater value that you would create—the reason that would entice this prospect to pay more to do business with you.
To be the least expensive provider, you must make choices supporting that decision so you can always compete and win on price. (This choice makes selling easy but tends to be the most difficult strategy to operate.) You can’t try to price to capture more margin without damaging your overall strategy. You have to be willing to abandon customers who want more and are willing to pay for it.
If you want to be the best and sell at the top end of your category, you must price your product, service or solution to support the enormous investment required to continually improve your offering and leapfrog your competitors. You have to be willing to lose the segment of the market that will never value what you do enough to pay for it.
The best total solution is the strategy of most service-based companies, even though they may not formally recognize it. By consciously committing to this option, you can clarify your offering to attract the right customers much more effectively. To compete here, you have to clearly define the ways you are different and how those differences help your customers get exactly what they need by buying from you. You probably won’t have the lowest or highest price in your space. Your challenge will be acquiring customers and spending time to develop the offering that best meets their individual needs. Your price has to support these development activities, which is why you won’t compete for lowest price.
Make your choice and make it carefully. Your ability to price your offering appropriately depends on the strategy you select.