How Low Can You Go?
Most people consider cutting prices to be a powerful way to attract new customers. But it's not always so simple. A price tag, after all, says a lot about a product or service. Go too low, and buyers looking for quality may turn elsewhere. Indeed, there are cases in which the best way to attract new clients is to push prices higher. "Pricing tells a story," says Per Sjofors, managing partner at Atenga, a consulting firm in Westlake Village, California, that specializes in pricing. We talked with three entrepreneurs about their recent price cuts. Then we asked Sjofors what they did right--and wrong.
Making a luxury affordable
The company: Sweetriot, a New York City candy maker
The product: A one-ounce tin of cacao-bean candy
Old price: $4.99
New price: $3.99
The goal: Founder Sarah Endline wants people to perceive her candies as high quality but fun. Working from a list of prices for premium chocolate bars, which ranged from $2.99 to $7.99, she decided to charge $4.99 per tin. Unfortunately, consumers did perceive Sweetriot's candy as a quality product--so much so that they viewed it as a rare treat. "We kept hearing people say, 'Wow, I'll buy this as a special occasion or as a gift," Endline says. "Part of the philosophy of Sweetriot is to be accessible--we don't want to have a price that's unapproachable." So she cut the price by a dollar a tin.
The result: Too soon to say, but some retailers say they are seeing a bump in sales.
Expert analysis: Why go down when you can go up? "I would have increased prices," says Sjofors. "The comment about people buying it as a special occasion makes me wonder, what's wrong with charging $9.99? She could also sell the same product in a fancier box, which is another way of capturing that willingness to pay."
A bargain service to draw foot traffic
The company: Kriser's Pet Supplies, a chain in Chicago
The product: Dog-grooming services
Old price: $55 on average, topping out at $100
New price: $46 on average, topping out at $85
The goal: A start-up chain that wants to expand rapidly, Kriser's viewed dog-grooming services as a perfect way to drive foot traffic to its three locations, which make most of their money on pet food and supplies. So co-founder Jeff Kalish wanted to charge noticeably less than other groomers. He cut prices across the board, with the top price (for, say, a sheepdog) dropping from $100 to $75. But many would-be customers seemed to view the low price more as a deterrent than an enticement. "When they heard our price, people would start asking questions," says Kalish. "Did we do full service? Were our groomers experienced?" The perception, it seemed, was that the company might be fly-by-night. So Kalish decided to try a smaller discount, setting its top rate at about $85, with the average dog-grooming gig costing $46.
The result: The number of appointments at the busiest store has increased from 40 to about 60 a week since the revised prices went into effect.
Expert analysis: Sjofors likes that Kriser's was willing to explore how low it could go before it undercut the perception of quality. Promotions, he says, are a good way to test bargain prices without projecting cheapness. For example, Kriser's could have offered prepaid frequent-grooming cards, or discounts on dogs brought in before 10 a.m. "If an offer didn't work, they could very quickly discontinue it," Sjofors says.
A price that challenges a rival
The company: Virtual Iron, a software company in Lowell, Massachusetts
The product: Software to manage servers
Old price: $1,500 per connection, plus annual maintenance fees
New price: $499 per connection, plus annual maintenance fees
The goal: Virtual Iron was launching a new version of its software for Windows--and it wanted customers of its main competitor, VMware, to take notice. VMware's comparable application starts at $5,750 for two connections, plus a minimum of $1,026 a year for maintenance.
Virtual Iron's software cost about one-fifth of the price of VMware's per connection. Virtual Iron wanted to draw a starker contrast. "We wanted the shock-and-awe value of being able to say we cost less than VMware's annual maintenance," says Mike Grandinetti, Virtual Iron's chief marketing officer. He is quick to add that the bargain price is only temporary. "Our intent is not to be the low-cost provider forever," he says.
The result: Since slashing its price in December, Virtual Iron has signed up more than 400 new distribution partners, and says more than 100 companies have picked Virtual Iron over VMware in side-by-side evaluations. (For its part, VMware claims that its software outperforms Virtual Iron's and "has significantly more features.")
Expert analysis: Sjofors isn't buying this strategy: "They're going to find it very difficult to increase prices," he says. "The perceived value of software is highly dependent on its price, so $499 associates Virtual Iron with low prices."