There is a real danger in “race to the bottom” pricing – basically, no one wins.
By automatically diving to the bottom price all you’ve done is dented your profit margin and your reputation – and lowered the perceived value of your product.
Mickey Drexler, CEO of J.Crew makes the following excellent point: “The best price is to sell it for what it’s worth.” Selling on value is key.
In their book “Why Killer Products Don’t Sell”, Ian Gotts and Dominic Rowsell identify three buying cultures that customers have and explain how you can maintain margin, even in highly competitive markets, without resorting to drastic price slashing in order to compete.
- Value Offered (VO) products fulfil a recognised need. Buyers make a choice to buy after taking the briefest look at the alternatives, all of which are priced similarly.
- Value Add (VA) products fulfil a recognised need, but the differences between the available products are generally complex enough that the buyer compares or talks to suppliers to help understand any differences. Here is your clear opportunity to “sell” yourself and the benefits of your product.
- Value Create (VC) is where you are creating new value for the customer – value they didn’t know they needed! To sell VC takes longer and costs more, but the margins are higher and the competition is lower. Most new products start as VC, with Twitter being a prime example of this. If you truly want to be successful, you need to add or create new value for your customers, exploit innovation and create new customer experiences.
HubSpot’s Director of Sales, Michael Pici, believes the most successful salespeople need to establish the value of what they are selling before talking about price.
He recommends they highlight straight away what sets their product apart from the competition, and assist the prospect to define their own purchasing criteria with objective value advice.
Getting your prices right is definitely a huge challenge and poorly executed pricing strategies can be the killer blow for retailers.
So, what’s the future? Matt Rubel from TPG Capital believes “New tools which will help you set the right price up front, so that you can arrive at the final price with the most gross margin throughput against your competitive set, to me is the wave of the future that we have to get on with.”
Nikki Baird (MD of RSR Research) says retail “winners,” are increasingly creating a separate pricing function and “with more tools available…to make better decisions.”
Mindy Meads of Wet Seal is a keen advocate for product differentiation: “You have to know your customer, who is that customer, you really have to understand who they are and what they are looking for,” she argues.
Mark Cohen of Columbia University agrees that it’s all about the customer: “There are no retailers in the world who have ever succeeded who have disregarded the behaviour of customers and the presence of competition” he says.
Greg Petro, CEO of First Insight, Inc. believes the most successful retailers and brands will avoid a race to the bottom by offering distinct, differentiated products, having an accurate understanding of the customer value and staying true to who they are as a brand.
The retailer who first drops the price of an item below the “floor price” is known as the “First Mover”. Those who match that price or drop their price below the previously established floor price are known as “Followers”.
Sandy Skrovan, who helps brand marketers and retailers to grow, believes that if you can detect the seller who “fired first” then you can help identify the root cause of unsustainable price competition to try and avoid a destructive race to the bottom. She also believes you should identify weak points in your supply chain, Minimum Advertised Price (MAP) policies, commercial agreements and pack sizing/structure.
Discounting is a hard game to win and ultimately consumers realise deep down that you get what you pay for. Make sure that you are the one they prefer to do business with by offering exemplary service and communicating excellent value for money.