Not everyone wants to buy cheap
When a brand doesn’t differentiate itself, it becomes part of a huge group of interchangeable options. Without differentiation, there is no incentive for the customer to select it over another. When all options look similar in the eyes of the customer, the decision will be based on price and the customer will be indifferent.
There’s a solution, though, and it’s entirely in your hands.
In April 2015, IKEA conducted a price experiment in one of its Madrid stores. The company added a zero to the price of a mattress already on display, taking it from 449 to 4,490 euros. To make sure the display matched the expensive price tag, the memory foam mattress was placed on a special lit base with a sign that declared it “New!” The original product name, Myrbacka, was switched to Fördomar.
Then the company studied customer reactions, which were swift. Shoppers viewed it as a better quality mattress and commented about the comfort and fit, even though it was the same, lower-priced mattress displayed in the past. IKEA reported that mattress tests increased as much as the fake price did, and that people used “infinitely better” to describe the “new” mattress .
The experiment proved once again that when something is cheap, it isn’t valued. Price is a relative perception of value. It shows how you define what you sell and how you can escape the monotony of the markets. We aren’t victims, we’re protagonists.
Competing on price is optional
I once read a wonderful story from Bernadette Jiwa that went more or less like this: Once, a hair salon displayed a sign proclaiming “Haircuts for $20.” Soon after, his neighbor posted a sign that said, “Haircuts for $19.” A few days later, haircuts reached the incredibly low price of $12. It was virtually impossible to own a profitable hair salon under those conditions. Finally, one desperate competitor made a courageous and resourceful decision. With great pride, he posted a sign announcing, “We fix $12 haircuts.”
The moral? You decide what kind of people you want to attract and what story you want to tell. It’s in your hands.
It sometimes seems like we are forced to compete on price. Faced with cheaper alternatives or competitors who continue to add benefits for the same amount of money, we feel that the only way to do business is to lower the price. But if we lower the price, we will hardly achieve our sales targets.
The good news is that lowering the price is optional. Of course, you can’t simply sell at higher prices without a reason. Consumers are more informed than ever, reading the fine print on labels, consulting the Internet, and getting referrals from other consumers. As we saw, the price is a perception of value for customers, so that value should be reflected in multiple benefits. It isn’t about how to make it so that the competition doesn’t lower the price, nor is it about how to change the customers’ mindset so that they don’t object to the prices. Neither customers nor competitors are under your control. Focus on the things that you do control and can adjust so that in the end, you can stop competing on price. You decide to whom and how you sell.
Competing on price is optional, because it’s in your hands to decide who you want to attract (people with a specific interest in whatever problem your product or service solves) and the story that you want to tell (your difference, as a basic reason for preferring you over the competition). That’s what the game’s about. Be relevant to a specific group of customers who appreciate your product or service and are willing to pay for the value it generates. Although later we delve into identifying the market segment that makes a perfect match with your value proposition, for now we should recognize that focusing on the customer profile for which our product or service is best designed doesn’t mean reaching fewer customers. It means reaching better customers.
When you can clearly understand that what you offer isn’t for everyone and that not everyone will appreciate the benefits you strive to deliver, your approach to the market changes. The people you want to serve are the people your business is designed for. You will continue improving in order to achieve a perfect fit with them. The people you decide to serve determine the whole business model, from how much to charge to how to design your services, from the size of the product portfolio to the delivery times. All business variables will be determined by the consistent fit between your brand and the people you’re serving. This will determine which things you should focus on to make your value proposition consistently relevant.
While initially the concept looks scary, prioritizing your business for a specific customer profile brings enormous clarity. You will stop trying to be everything to everyone. In addition, the best reward you can probably get is that these people won’t only become your best customers, but they will become your best promoters and most fervent fans, too. These are people who want you and your company to succeed. This doesn’t happen very often. Passionate customers who are truly happy to do business with us aren’t common. In the long run, this is what ends up making the difference. Customer relationships last longer when you specialize in serving and understanding the specific audience that appreciates your value proposition.
The business model can’t be questioned every time a customer says that they don’t like or value something you’re offering. It may be that they aren’t the type of client you’re looking for, but it doesn’t mean the business model is wrong. The business model is correct; it’s the client you’re trying to sell to that’s wrong. Instead of trying to convince everyone who passes by to buy, you must clearly choose the ones who are the best match for your value proposition.
You don’t want to change your business model because a potential customer doesn’t like it. You can make adjustments, of course, but what isn’t negotiable is whether you’ll deliver less value just to sell cheaper. Sooner or later, this will affect your differentiation and positioning. You can’t give up what makes you special simply to be consistent with cheaper options. This makes no sense. There are people out there who are willing to pay for the better options you offer.
If we eliminate benefits that are essential and make us different, we’re destroying the brand’s identity. We can’t offer the extraordinary level of service we’re obsessed with or maintain inventory levels if we’re operating at the very limit of profitability.
Build the company you want with the standards that customers want. Make something truly different. Break the mold. Offer an alternative to customers who are tired of having to accept that all companies offer the same things. It’s not that people aren’t willing to pay for better solutions, it’s that we need to actually provide better solutions.
For example, Canaima, a company that sells construction materials, needed to figure out how to improve bulk sand sales . People usually bought sand in a store based on how much they needed. It was immediately loaded with shovels onto a truck or packed into bundles. Sellers thought this was the cheapest way to do it, and they thought that people liked buying it this way – until they decided to improve the process. Instead of expecting customers to wait for them to shovel sand into the truck or bag it, they began to offer pre-packed sand.
“I decided to have it ready from the day before and create a measure of new sales, selling it in by sacks, and recovering the cost of the manual labor and packaging,” said John Jairo Salazar, company manager.
The purchase reference price is cubic meter, the equivalent of 200 shovelfuls of sand. Until then, a cubic meter was sold in 20 sacks of 10 shovelfuls each, at a price of $22. Each bag was very heavy and the process was slow and expensive for the customer. Canaima innovated by packing it ahead of time into smaller, secured sacks using exact measurements. Now, the same cubic meter sold in 25 sacks of eight shovelfuls each is priced at $26.50. The benefits to the customer were so highly valued that although it cost 20 percent more, sales increased.
“We have increased sales by 30 percent and generated new employment: I hired a person who starts at 5:00 p.m. and packs 250 sacks daily. Many times we don’t have enough. We have had some days where we sell up to 600 sacks. The customer doesn’t mind paying more, knowing that they get an accurate measurement, delivery is fast, there is always availability, it’s easy to handle and transport, there is no waste, the vehicles that transport the sand and where we work are cleaner, on top of receiving all of the sacks securely packaged,” adds John Jairo. Currently, sales of the sand bags represent 50 percent of the business’s total sand sales.
Competing on price is optional. You decide what kind of customers you serve and what story you want to tell.