Are you fed up with having to compete on price?
If you experience any of these below, you are operating in a price-sensitive market.
Competitors dropping their prices
Having a long sales cycle (because the customer didn't quite ‘get’ why they should be paying what you're asking for).
Price auctions: That's where the customer will get a quote from you and then get in touch with a competitor who will quote a cheaper price, and then come back to you in an attempt to reduce your price further.
If you are then this article will show you;
how you can stop price erosion,
how you can maintain your margins
how you can even increase your price in a hyper-competitive marketplace.
There could be several reasons why a marketplace becomes sensitive around price. Here are three:
A competitor enters the market and decides they want to dominate it and so drops the price to try and capture as many customers as possible. This forces everybody else to follow suit in order to compete.
Restrictive reseller agreements
Or because people choose to sell purely on price - using price as the only tool in their selling armoury to win the sale.
However, more often than not, the reason why price becomes an issue is that the customer doesn't recognise the value of the product or service and so can't attribute the correct price to it.
Price is What You’re PREPARED to Pay
Price isn’t fixed, in fact, it’s a function of perceived value. In other words, how much you are prepared to pay for something. For example, let's say that we both want to buy some garden furniture. You have a beautiful garden and you love sitting outside and so you'd be quite happy to spend £2-3,000. But, I only have a small garden and don’t spend much time in it so, for me, I would only be prepared to spend £5-600.
Our preparedness to pay is dependent on our perception of the value of what we’re getting back.
Take the example of Rolls Royce: It doesn’t cost as much to make Rolls Royce as it’s sold for. There’s a huge gap between the two and that gap is filled by the perceived value of the brand (i.e. the fact that it says Rolls Royce on it.)
Or the example of your house: The rebuild cost of your house is very different from the amount that you paid for it. The fact you paid more is because your perception of the worth of your house is very different from its actual cost.
Or how about a £1500 Gucci handbag? It clearly doesn’t cost anywhere close to £1500 to make, but in that is a whole load of perceived value created by the brand, the design, the desire for it and so on.
All these examples prove that price is a function of value and, therefore, is elastic. In other words, what you and I are prepared to pay for the same thing may be different. For example, if I want to get a product today and it's really important to me I have it now, I may be prepared to pay twice the price. Whereas you might not need it now and decide to wait until Black Friday when it's half the price. So, the price is elastic dependent on the circumstances and perceived value.
Richard Denny did some interesting research around this in the 1990s and found that about 5% of people will always spend the most that they can afford on something, that 15% of people will always spend the least that they can get away with and the remaining 80% will spend according to their perceived value.
So, if price and value are elastic components in business, what can you do to try and raise the price when the marketplace is price-sensitive? What can you do to increase that sense of value with our customers when the price is such a big issue?
Build Value Around Your Products
The first thing is not to concentrate on price or price-cutting, but instead focus on building value in your customer’s mind.
You can do this very easily by talking about the benefits that your products and services, bring to your customer. Let’s just quickly recap on the difference between features and benefits. As an example, a feature of a car would be it has a GPS, but the benefit is that it gets you to where you want to be on time, unflustered, even if you've never made the journey before.
Benefits establish the value of a product, whereas features just list what it does. So the simple way to build value in your customer’s mind is to find all the benefits that are associated with each one of your products and services and list them on every piece of marketing collateral that you have.
Build Value Around Your Business
The second way to create value in your customer’s mind is to identify the benefits that your business brings to the customer.
This is particularly useful if you find yourself in a marketplace where you sell the same thing as your competitors - white goods are an example of this. Let’s say, you sell the same washing machine that’s sold by your competitors. It has the same benefits which make it difficult to differentiate between you and your competitor since you're selling the same thing. However:
You’ll find that most of the competitors will be talking about the features of the product not necessarily the benefits of it.
You’ll also probably find a few more benefits to it which aren’t mentioned by your competitors.
Beyond emphasising the benefits of your products and services you can also emphasise the value you bring as a business to generate additional perceived value in your customer’s mind. Here are a few ideas to start you off.
Guarantees (or risk reversals) are incredibly powerful in helping customers feel that they're not taking the risk when buying from you. And that makes it easier for them to give you their money. For example, a money-back guarantee or a 100% satisfaction guarantee which offers some suitable compensation if not reached.
Free insurance can be another form of guarantee helping to increase your value. If you can give something away for free with the sale, then you are doing something called offer stacking. Here you take your core offering, and then you stack on top of it other things that you can provide which you either sell at a very small amount or simply give away for free.
Social proofing can also help build confidence and value with your customer. For example, testimonials reviews on sites like TripAdvisor, Feefo, Google Reviews Facebook Reviews, etc. Plus, if you've been going for a long time, then why not shout about it - if you've got 15 years of experience, then that's worth telling people since it will create confidence and perceived value.
So, those are the two ways in which you can start to develop value. Firstly, find the benefits of your products and services. And then secondly compounding that with the benefits of using your business such as, guarantees offer stacking testimonials, social media and your company history.