One of the Best Articles on Pricing You'll Read
- April 2, 2012
- 1 Comments
There can be only one (cue Highlander) low cost provider in any market. In most cases, unless you have some defensible, sustainable cost advantage (think Southwest airlines), this will not be you. So don’t get in a price war with bigger competitors. All you do is transfer money to your customers’ pockets, and greatly reduce your income (see the introduction for some examples). You have the advantage that you don’t need a huge slice of the market, so you can focus on a niche that perceives a lot of value in what you do. For example, Wal-mart can’t provide great service, but it can provide cheap bikes. If local bike shops tried to compete with Wal-mart on price, they would lose.
Lesson: focus on value more than price. But inversely, for the customer – do you really want the low-cost provider or do you want a vendor that provides great service? (they’re rarely one-and-the-same).
The other key lesson in the article is that if you’re too busy (“I have a supply problem”):
I like to say “you don’t have a supply problem, you have a pricing problem.” Many of the folks making these complaints haven’t raised prices in years. They are not even keeping up with inflation, let alone increases in the perceived differential value of their offering. Being “too busy” is a symptom that you are not managing demand well.
Pricing is a key way to manage demand, if you can’t fulfill all the demand coming your way – but many people fail to see that. Your products and services are worth different amounts to different potential customers. Find the customers that value you more highly.
If you’re in a consulting firm, a good companion read to this is the Consulting Math vs. Software Math post…