How Low Prices Can Hurt Your Business

Larry Alton
Larry Alton
Guest Contributor

To benefit from low price points, you must know your market – if it just wants the product, you’ve got some room to play with pricing. However, if your market wants experience, lowering prices can diminish the perception of value.

Low prices are everywhere. Some retailers, like Walmart and dollar stores, build their empires on a foundation of low prices. Other retailers introduce low prices in an attempt to compete in saturated markets.

If you’ve been trying to compete in your space by lowering prices, you may want to pause and rethink your strategy. Lowering prices isn’t entirely off-limits – it just requires careful consideration. How you price your products determines not just sales, but the perception of your brand as well.

When you charge too much, your products won’t sell. Charge too little and you may accidentally fix your product’s market value position too low. If that happens, it’s nearly impossible to raise your prices.

A price point represents more than monetary value to consumers

The coffee industry provides a great example of how a price point represents more than money to consumers.

Anyone can buy a can of pre-ground coffee for less than ten bucks. That can will last many days, even weeks. Still, millions of people rush to Starbucks every day to spend between $3 and $6 for a cup of artisanal coffee. Why? The value Starbucks offers isn’t coffee – it’s an experience.

Free Wi-Fi aside, people enjoy the atmosphere of Starbucks more than anything. It’s an opportunity to get away from the stress of daily life, a quiet place to read or get work done, and a place to connect with friends.  That’s what people are really paying for. The cup of coffee is many times incidental.

Other coffee shops serve fresher coffee, pull better espresso shots, and charge half of what Starbucks does. However, these coffee shops attract a smaller niche crowd because they don’t offer the atmosphere Starbucks does. Starbucks doesn’t need to lower their prices to compete with other coffee shops because coffee isn’t their main product.

Common goods don’t need to be priced low to sell

Low prices often reflect low-quality products. We see this in dollar stores with products that can barely withstand a single use. While disposable party goods like napkins and cups can be purchased at any dollar store, many people are willing to pay more for high quality party supplies. Again, it’s not just the product people are buying – it’s the experience. Most hosts want to give party guests more than a dollar store experience.

Consumers don’t always want low prices

Consumers often don’t behave rationally. They won’t pay an extra $2 for a jar of pickles but if they can’t afford that $1,000 handbag, they’ll charge it. When your product makes people feel wealthy, abundant, or trendy, they want to pay more.

According to Investopedia, luxury goods are the ultimate retail therapy. “According to a study published by the Journal of Experimental Social Psychology, low self-esteem is a big factor in whether a person will buy luxury goods that he may not be able to afford,” the article says. “For consumers trapped in institutionalized poverty or those living paycheck to paycheck, a luxury good can go a long way in increasing self-esteem or providing a sense of belonging.”

Even if you don’t sell luxury goods, the prices you set will influence the perceived value.

Revolutionary products should never be priced incrementally

An incremental pricing model works well when you’re making small changes like upgrading materials from plastic to leather or adding backlit LED screens. For instance, if your new model costs 15 percent more to produce, then it makes sense to charge 15 percent more. However, when the new product is revolutionary, this pricing model can cost you plenty of revenue.

According to Mckinsey.com, the incremental approach underestimates the value of new products for customers. Using an existing product as a reference point to determine price for a revolutionary product can erase potential profits.

People are willing to pay a premium for innovation

Provided your product is useful and solves a problem, people are willing to pay a premium for it. Look at the Wurf Board for an example of high-priced innovation. It’s an inflatable standing mat for people who use standing desks, and its innovative design makes it worth the $300 price tag. It inflates and deflates quickly, rolls up for easy transport, and has hooks for connecting exercise bands. It’s also scientifically proven to increase cognitive attention by encouraging continual movement.

Know what your market wants

To benefit from low price points, you have to know what your market wants. When your market just wants the product, you’ve got some room to play with. If your market wants an experience, however, lowering your prices can diminish the perception of value.

About the writer: Larry Alton is an independent business consultant specializing in tech, social media trends, business, and entrepreneurship. Follow him on Twitter  @LarryAlton3 and on LinkedIn.

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