Tuesday, March 27, 2012

From 1,80€ to 8,40€: Where is the increase in value?

Are you adding value to your price?
A few days ago I had an experience that made me think very deeply about the need to talk, share and strengthen through this blog basic and fundamental marketing and business concepts, especially when the economic crisis itself is asking us "to reinvent ourselves or die" and, on top of everything, asking us to do things differently, to obtain different results.

Driving in a small town, I needed to buy a glue gun and stopped by a service station to ask where I could buy one. The attendant gave me instructions to go to a hardware store on the village, which was about 500 meters away, more or less.

Even though I didn’t remember the price I had to pay the last time, I was willing to pay as much as 3 € for the new glue gun, and knew that I wasn’t going to be requested more than that amount, so I was good. I got to the store I was referred to go and asked the clerk if he had a glue gun and how much did it cost. The clerk said yes and then stopped to look at his price list.

"It costs ... let me see ... uhhh ..... 8.40 € "- he said quietly.

All of a sudden, I didn’t feel good anymore. I felt a little weird, kind of shocked, wondering if I didn’t get it completely, or if the clerk was simply kidding.

"How much is it?" - I asked, still amazed.

"8.40 €" - he confirmed.

If the price is excessive, your client will leave and buy from your competition.

So there was nothing else to be done. The price I was offered was much more than what I was willing to pay for the glue gun. In fact it was almost 3 times what I had in mind. I thanked the clerk and left the store.

Not far from that place, in the same town, I got to a small bazaar in whose sign I could read: "Housewares" and so I stopped my car. Again I asked the clerk if he had a glue gun and the guy said yes. He had the same type of gun I had been offered in the first place, also in a transparent bag, no label or brand, and at first I didn’t feel good, because I thought the price was going to be the same as I had been asked before, being the same product as it was. My surprise was huge when the clerk told me the price. He said: "1.80 €"

"Whaaaaat? 1.80 €?" - I thought. Obviously, I took out my wallet, picked the money, paid and then left, as happy as a child with a new toy.

1.80 €! 40% less than what I was willing to pay for the damn glue gun and 80% less than what I had been asked in the first store I went, in the same city, and only a couple of minutes away. Luckily I didn’t buy it in the first place I stopped by: I would have had thrown away 6.40 €!

When products are the same and do the same, only the added value justifies a price increase.

As I sat in my car, I couldn’t do anything but think about what had just happened to me that day. From 8.40 € to 1.80 €. A 6.60 € variation between one price and the other. An almost 4 times variation on the price I finally paid for the product.

What factor can justify such a big price difference on the same type of product in two different companies? In my personal opinion, and in a situation like this, there are only two elements that might become a justifying factor:

  • The perceived brand / company’s value.
  • The additional value added to the product.

However, in this case, it was an unbranded, generic product, which I received on a plastic bag, without any type of fancy design or anything at all. It wasn’t that I was buying a glue gun manufactured by BMW with the top of the line technology, but a generic product.

In terms of added value, it was just more of the same. A glue gun does just that: to assist me on gluing things, nothing more. And in this case, it wasn’t a stun gun, nor had a different grip, or performed a different operation. It was simply a glue gun. The same one as I had been offered in the first place.

And it's not up to me to say that the pricing policy of either business is better than the others’ because if you ask each dependent separately why they have that price, each one will give you their own reasons and they are all likely to be valid.

The analysis of competition and the pricing policy of a product.

What is completely clear to me is that the first business owner didn’t take into consideration what their potential competitors were doing when he was deciding what the price for the glue gun was going to be. And not because you necessarily have to have the lowest price to be competitive, because in fact, personally, I'm not usually an advocate for low pricing policies, quite the opposite, I always like to recommend adding value to products to create and strengthen the perception of value.

However, you obviously have to be aware of what’s happening around you, if you want your business to stay afloat. Without a proper competition analysis, even though you don’t pay full attention to the information you collect, it becomes very difficult to make relevant business decisions.

If you have a product that, in your very same town, can be bought at a price 80% cheaper, you necessarily have to offer something extra (add value) with your product if you want to sell it. It's that simple.

Either you add value to the product itself, like adding more features to allow the product make its job better, or you must add value to the service your company  offers. But either way, you have to add value in some way to justify an increase in price.

Your potential customers need to feel they are getting something in return for those euros they are paying in excess for your product, otherwise you take the risk of being perceived as a loan shark business, to put it on a decent manner.

Don’t ever allow a decrease in sales volume to be your reason for increasing prices.

Unfortunately it’s happening very often that small businesses turn to increases in pricing to compensate for declining sales in recent months. The downside is that, most of the times, prices are increased but no value is added to the product itself. And this can be an error with serious consequences.

Probably a price increase will generate additional income for a certain period of time, but at the moment your product stops being competitive in the market, then not only you will no longer receive this additional income, but your customers will start buying from other businesses, and not yours.

Then, you lose the customer, the extra money, and also you’ve generated a negative “I-do-not-have-competitive-prices” kind of reputation for your business.

Note that to justify the price difference between your products and those of your competitors, you must add value. Remember that price is a critical component of your product, because it can allow it to live longer and more prosperous, or it can make the product be condemned from the very beginning.

Do you think I'll stop by the store in which I was offered the glue gun for 8.40 €? Never again! I don’t even give myself the opportunity to find out if they have good products or not, because the perception that remains in my mind is that they are usurers, that’s it. Do you want your company to be perceived the same way?

Related article: Benefit’s Marketing: You want my money, I want benefits.

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