Historically, businesses – and even whole industries – that compete on price don’t fare well.
In the early 1990s, Rupert Murdoch set out to dominate the UK newspaper market…
He decided to slash the cover price of The Times, believing this would drive his main competitor, The Daily Telegraph, out of business.
As expected, The Daily Telegraph responded with a significantly discounted subscription offer.
…And the price war began.
While this discounting strategy gave a modest boost to The Times readership, reducing prices had a devastating effect on its profit margins.
As a result of the slashed prices, newspapers spent this time period without the resources they needed to provide in-depth news – tarnishing the quality perception of UK newspapers.
Even worse for Murdoch, he failed to achieve what he set out to accomplish in the first place!
This is just one example of the dangers involved in trying to compete on price alone. By reducing the price of one publication, he actually helped diminish the quality of a whole section of the industry.
As the saying goes: “You can’t have your cake and eat it too.”
When you compete on price, it’s extremely difficult to provide exceptional customer service and a quality product – in turn damaging the perception of your products or services in the eyes of consumers.
…And this tactic rarely works. After all, with criminally low labor prices in countries like China and India, and a million different ways to cut corners, there’s always someone who will be able to offer the same product or service for less money.
Instead, businesses need to focus on conveying why their product is worth more. As you increase your margins, you can reinvest in providing your customers with the greatest advantage and benefit possible.
There are plenty of examples of companies that are able to maintain consistently higher prices, even in very competitive markets. Here are three businesses thriving, not in spite of charging premium prices… but because of it.
If you go to Amazon to buy an Apple iPod Nano, it costs about $150 (depending on the model).
Visit the Apple store, and the price will be much the same. Decide to purchase at big box retailers like Best Buy or Wal-Mart, and you can still expect to pay about the same price…
Apple has been very successful in maintaining its (high) prices virtually everywhere in the world.
You see, Apple understands the danger of competing on price. If it lets one retailer sharply discount its products, it can have a lasting impact on the perceived value of Apple’s products across the board.
Charging premium prices has proven to be a very profitable strategy for Apple. In fact, Apple enjoys profit margins estimated between 45% and 61% for many of its products.
For example, the premium model Apple iPad Air sells for $929. That particular iPad Air only costs Apple $361 to make.
The fatter profit margins enable Apple to reinvest heavily in marketing their brand, as well as putting that money into producing the highest quality products. It also allows Apple to provide the kind of customer service its lower priced competitors simply can’t match.
Buy a Vente Caramel Frappucino and you can expect to pay over $4.00 for your cup of coffee…
But visit McDonald’s for your coffee, and you can pick up a cup for as little as 99 cents.
Starbucks is able to charge such premium prices all because of how it has differentiated its brand.
When you buy from Starbucks, you aren’t just purchasing a cup of coffee – you’re purchasing a premium experience.
Starbucks creates this experience through the design of its shops, the softly playing jazz, the quality of the coffee beans, and its friendly and well-trained baristas.
As Bruce Horowitz from the USA Today pointed out:
“You may not be able to afford a McMansion –
or a Lexus to park in its garage – but millions
of us are willing to make that $5.00 splurge simply
because it makes us feel a bit better about ourselves.”
If you want to learn more about how Starbucks is able to charge premium prices for its coffee, take a look at these 7 hot marketing ideas.
The comedy rap outfit “Fog and Smoke” created a viral sensation with their YouTube video It’s Getting Real In The Whole Foods Parking Lot. The video pokes fun at Whole Foods (and its customers) in a playful way, but one of the most telling moments in the video comes right at the end, when we hear how much he paid;
“I pay my eighty bucks for six items and get the heck out…”
If you require convincing that you can charge premium prices for commodity items, then a quick visit to whole foods should change your mind…
Almost any item that Whole Foods sells – rice, vegetables, juices, wine, grains, breads, eggs – can be purchased for a cheaper price somewhere else.
Despite their sometimes eye-watering prices, Whole Foods remains immensely popular… And they refuse to compete on price.
Whole Foods has achieved this by attracting the kind of customer that cares about the quality of the food that they eat, and wants to find something unique. This is reinforced with clever branding and appeal to larger cultural trends – such as the interest in sustainability and eco-friendly foods.
Competing on price alone is a losing game. Focus on providing value, and you will be able to increase your prices even while increasing demand.
If you want to learn more about how you can strategically create price elasticity for your business, you will find more tips and strategies in The Growth Factor – which you can download here for free.
In your corner,