Whether it is a B2B salesman negotiating the price to close the big contract, or the retailer offering discounts in order to gain market share, it can seem like the obvious choice. But can you really afford to compete on price? Here’s why not…
Discounts are the thin end of the unprofitability wedge. It feels like they are a small, affordable sweetener to make the sale go through. But buyers are remorseless, and they will scent blood. Their job is to pay as little as possible, and if they sense you are willing to drop 10% this time, they will ask for 15% on the next one. And you’ll probably let them have it. So the sweetener becomes not only a drain on profits, but a clear signal to the market of the value that YOU place on your product or service. If you don’t value it, why should they?
When was the last time you haggled in an Apple Store? And even when they do negotiate, why do some companies still end up with higher prices and bigger margins? You need to change the way you look at it. You’re not one little discount away from losing the sale. The customer is equally in danger of missing out on the perfect product or service that they need. And they will only believe this – and agree to pay your price – if they understand the real value of your service/product to them. Sure, they can buy from someone else, but it will never be as good as yours.
The agony of choice
On of the key reasons that companies are tempted to compete on price is that consumers have higher expectations and greater choice than ever before. This, in turn, is largely because every market – from ice cream to insurance – is instantly visible online. Every competitor in the world is vying for the top page of Google and the stark reality of competition has never been more visible. In addition, better, cheaper logistics and lower digital marketing costs has reduced barriers to entry. Everyone wants a piece of your pie – and they’re finding it increasingly easy to take it.
Peter Drucker saw it coming. Often described as “the founder of modern management”, Drucker was known as one of the smartest business thinkers in the USA, known for his analysis of the human factors in business and marketing, when everyone else was only interested in crunching numbers.
He noted that one often overlooked phenomenon of the modern age was the vastly expanded level of choice available to people:
“In a few hundred years, this age will not be remembered for the Internet or technology or e-commerce but for a change in the human condition. For the first time, substantial numbers of people have choices. For the first time they will have to manage themselves. And they are completely and utterly unprepared for it.”
Peter Drucker, 2000
Whatever they may say, people do not like choice. They do not like making decisions. The luxury of choice only serves to make their lives harder and, as a business, you should be making your customers’ job easier. Give them a clear, understandable reason why your product is preferable to your competition. Don’t make them guess. And don’t make them look straight at the price tag.
People will pay good money for something that delivers the precise benefits they are looking for. The thrifty Yorkshire farmer will invest in a new £50k tractor, because he knows it will not break down during the harvest. The retail property manager will pay twice the rent of others, because he wants his retail outlets in the middle of the most prestigious shopping malls, not tucked away down a side street. The IT director will buy IBM, in accordance with the traditional mantra that “no one ever got fired for buying IBM”. IBM, by the way, do not compete on price.
“People round these parts don’t buy expensive things”
Wherever you go, you will meet the same reasons for price cutting – i.e. that the particular area you are working in is ‘careful with its money’. Expensive brands don’t sell round here. Whether it’s canny Cockneys, thrifty Yorkshiremen or any other stereotype, this is simply untrue. It is human nature to want more for one’s money, and those who have less are more careful with it. But these are socio-economic reasons: geography has nothing to do with it. Look around your local town and if you see anyone carrying a Waitrose bag, driving a Mercedes or using an iPhone, you’ll know there is a market for premium products. And that is virtually every town in the developed world.
Marketing = value preservation
So how do we turn your product from a willingly discounted commodity to a category leader that justifies a hefty premium? This is the true value of strategic marketing.
We’ve come a long way since marketing was known as the “colouring-in department”. But many companies still struggle to see the value in what they think of as marketing. And the reason they struggle is that their perception is usually wrong.
The aim of marketing is essentially to create markets. To find people willing to exchange money for a certain product or service, and the marketing department should have the power to adjust a number of factors in order to achieve this. They can alter what they sell, how much they charge, where they sell it, and how they promote it – known by every business management student as Philip Kotler’s original Four P’s: Product, Price, Place and Promotion. (Note: We’ll discuss John Elkington’s 3P’s of People, Planet and Profit that make up the Triple Bottom Line another time).
The task of setting a non-negotiable price in exchange for a distinctive and clearly-defined set of benefits is therefore a key, strategic decision – rather than something that can be tactically amended. If you want to be able to defend against discounters, and protect a healthy margin on every sale, you (or your marketing department) will need to address the following requirements:
1. You need to find a differentiator
Most companies start off with a vision: to build a company known for doing things a certain way. Keeping this vision alive as the company grows is essential. If your product or service is exactly the same as the one they can buy just down the road, you will be driven inevitably into a price war.
They key to identifying your differentiator is to understand the sacrifice you need to make. If you try to be all things to all men, you will end up being nothing – and once more commercial gravity will grab hold of your business and drag it down into the bargain basement. A few examples:
Volvo: the car manufacturer who has gained a reputation for safety over performance. Now, Volvo’s cars are not just safe. They are also fast, beautiful, reliable, technologically advanced, and frequently luxurious. But to differentiate itself, it has always led on the build quality and the safety that this implies. It’s not sexy – but not everyone wants sexy.
Ben & Jerry’s. It’s ice cream. It’s sweet and sticky like every other ice cream. But Ben & Jerry’s was created with a style that sets it apart from the other brands. Haagen-Dazs might be posh. Walls might be old fashioned/traditional. But Ben & Jerry’s is irreverent, fun and true to its hippie roots. Ice cream is an emotional, often impulsive purchase, and their style has helped to set them apart from competing brands. Could Haagen-Dazs get away with calling one of their flavours Phish Food?
IBM. For many long decades, IBM had a stranglehold on the IT world because they made the mainframes that drove the world’s business. But while technology has moved on, IBM’s culture has remained strong, and makes them hard for business buyers to resist. IBM is business-focused, experienced and utterly global in its presence. In a volatile world of hi-tech start-ups, IBM is the reliable option.
So how do you decide on your point of difference? Experienced marketers will take a look at the market you intend to operate in and map out where the competition is positioned. Indeed, the same Internet that presents the buyer with so much choice, also delivers all that competitive information to the marketing department. Use it wisely, study your market, and choose a differentiator that leverages your strengths, whilst playing on your competitors’ weaknesses. And stick with it.
2. You need to target people who like that differentiator
What are your customers like? I mean, what are they really like? You may have a broad idea of the demographics, i.e. gender, job title, age and so on. But if you want a true differentiator, you have to also understand the underlying emotional motives of the people who are attracted by your differentiator.
What makes them choose you? They may value reliability or quality. They may value a single feature of your product – or the fact that it works with something they already have. Or they may be attracted by the sheer kudos of being associated with you. These motives are not always as obvious as you think: for example, one of the strongest motivators in B2B purchasing is not to buy the best product, but to keep someone else happy – whether that is the MD, the biggest shareholder, your partner, or your children.
Another key reason for not competing on cost is that price-sensitive customers are the least loyal. If you have a key, discernible differentiator that is hard to imitate, people will stay with you. But the breed of customer (and it is all of us sometimes) who looks for the lowest price is extremely fickle. If you stop discounting, they’ll also disappear – meaning that you will have made very little profit over a short period of time – not a desirable relationship
3. You need to communicate that differentiator.
So you have a product with a difference, and you know what kind of buyer will be willing to pay a premium for it. Now you need to reach out to them and let them know. This is where the fun starts – and also where you can quickly waste a lot of money if the first two parts have not been done correctly.
If you have correctly identified your audience, the choice of marketing channel should follow. Ten years ago, we went straight to the magazines, newspapers and TV channels, who claimed to have a broad idea of the demographic of their readership. It is now, of course, a million times more nuanced, with data-driven online ad techniques able to target precise demographics as part of a campaign that you can manage from your own desktop. Automated email, powered by hugely sophisticated databases, enables you to feed a series of messages to prospects depending on their digital behaviour – effectively warming up the prospect until they are ready to buy.
But a contact strategy is about more than just choosing channels. You also have to consider what you say and how you say it.
If you sound cheap, it is a natural assumption that you are cheap. Whereas if you want to command a premium, you need to back up this perception in everything you do. Bear these three ‘rules’ in mind:
You wouldn’t expect to pay an above average price from a shop with dirty windows, so why work with a company that clearly spends nothing on its website? Every external-facing element of your company, from your name, logo and website down to the state of the carpet in the office reception, will help to project an image of quality/value.
Make sure everyone follows the same script. Once you have decided why you are different, you have to emphasise this at every turn. If you are the reliable option, play that card at every opportunity. Reinforce your positioning, don’t dilute it.
This is where science gives way to art. Is it a table priced at £1,000? Or a beautifully crafted traditional solid oak table, created by an award-winning designer, from a single, sustainable Swedish oak for £1,000? I know which one I’d rather buy.
While the focus of this article is on preserving a premium price for your product, it is of course not the only strategy. It is absolutely viable to compete on cost, but it has to be a single-minded strategy and the whole organisation needs to be geared up to reduce its own costs to the minimum. Ryanair is a lean operation that is able to charge some of the lowest air fares around. But it cannot do this without compromise. Lidl and Aldi will sell you a pint of milk or a loaf of bread for less than Waitrose, but they too forgo some of the elements of the shopping experience that keep Waitrose customers loyal. The point is that if you are competing on price, you have to really compete on price – and there will always be someone bigger than you who can undercut you (even at a loss) in order to win market share. Low cost leadership is a risky strategy and a tricky position to defend. They used to say “pile ‘em high, sell ‘em cheap’. But that only works if you are big enough to stack them high enough. For most of us, we need a clear differentiator that is not the amount of money we charge.
Sounds easy – and, in fact, it is. So why then do we find ourselves still having to cut our costs in order to win business? To answer that we come back to the point at the beginning. If we take a short-term perspective, we do what we have to do to close the sale. But that will simply make it harder next time. We need to take a strategic, long-term view of the value we give our customers.
Of course, one of the problems is that marketing teams are often busy with the day-to-day activities of lead generation, advertising and so on. They rarely have the time (or sometimes the experience) to focus on more strategic issues. In these scenarios, it can be a good idea to support them by bringing in a little independent external advice. An augmented marketing team can give you the best of both worlds: third parties like Wall To Wall Sunshine bring an independent, strategic perspective, while your team has the deep product and audience knowledge. Working together, they can get your profit margins back to where they should be.
Wall To Wall Sunshine provides marketing advice that is totally focused on business objectives. Quite simply, that means we put our clients first and focus entirely on achieving their objectives. So when we help our clients with their marketing strategy, it’s not about high-level theory and jargon; it’s about helping them to do better business.
If you’d like to know more about what we could do for you, please call us on 01392 877855 or email Matt Cotton.