Consumers and businesses have tighter budgets these days, and coaxing them to shell out for high-end products has become a challenge for entrepreneurs. Some, like John Demskie, CEO of RTI, are going downmarket.
Demskie's company, a Shakopee, Minnesota -- based business with 50 employees, sells remote controls for about $700 to $900 apiece to companies that install high-end home theaters. Revenue increased about 50 percent a year during the housing boom, but after sales fell 15 percent in 2009, Demskie decided to launch a line of moderately priced home theater remotes for do-it-yourselfers and installers of lower-priced home theater equipment. "It wasn't much of a decision," he says. "It was a necessity."
But a move like Demskie's is not without risk. For starters, lower-priced products often come with lower margins. And, if you aren't careful, the cheaper product could cannibalize sales of your high-end items. Plus, if the low-end product becomes too popular -- or if there are quality issues with the cheaper product -- you could tarnish your brand. Here are four smart ways to go downmarket.
There may be costly features that some customers would rather do without. Survey customers and observe how they use your products. Last year, ClearCount Medical Solutions, a Pittsburgh-based company, launched a high-tech system that tracks surgical sponges in operating rooms -- and makes sure the sponges don't wind up inside patients. After some hospitals said the $17,000 device was too pricey to install in every operating room, CEO David Palmer decided to develop a stripped-down version.
Palmer invited several hospitals to test the $17,000 system while he and some of his 21 employees observed. After watching more than 100 surgeries, Palmer and his team figured out that, though some complex procedures required the full system -- which includes a high-tech trash bin that automatically counts every sponge -- many minor surgeries merely needed a wand that scanned a patient for sponges.
Since ClearCount began offering a $4,000 scanning wand, the company has landed deals to outfit four hospitals with 80 devices, a mix of higher- and lower-priced products. "Now we can custom design a solution for hospitals that is tailored to their needs and budgets," Palmer says. He expects sales to reach $4 million this year, up from $1 million in 2009.
If cheaper products aren't substantially different from higher-end versions, customers may stop ponying up for pricey models altogether. The team at PF Digital, a McLean, Virginia -- based company that sells digital picture frames, learned that the hard way. Joe Espejo, PF Digital's president, says that in 2008, his company rolled out several new digital frames, including a 7-inch model for $99.99 and an 8-inch one for $170. The two frames had nearly identical features, except that the higher-priced model, in addition to being slightly larger, had a sharper picture. Guess which one most shoppers decided to buy? The popularity of the cheaper frame lowered margins and hurt profits, Espejo says.
Last year, he scrapped both frames and rolled out a high-end, $200 model with a 10-inch touchscreen and video playback. Espejo says the company plans to launch another cheaper digital frame, but this time it will be clearly lower end, with some of the better features stripped out.
Instead of creating lower-end versions of an existing product, some companies maintain a high-end brand image by selling affordable mini luxuries. J.B. Schneider and Antonio Turco-Rivas, founders of P'kolino, a maker of children's furniture in Dania Beach, Florida, decided to take that approach in 2008. The company, which sells play tables that can go for as much as $1,400, rolled out a line of small toys and crafts. Most sell for less than $40. Schneider says the new products have the same design aesthetic and are made of high-quality materials that set them apart from mass-market toys. "These are still premium items," he says, "but they are more consumable products that have broader appeal." The new items helped P'kolino keep sales steady at $1.5 million last year.
When companies decide to create lower-end products, one of the biggest decisions is whether to create a new brand. Using an existing brand name can help a new product gain instant identification, but creating a new brand can keep cheap products from tarnishing a company's image -- or angering its existing customers.
That was Demskie's concern for RTI. He worried that the cheaper remotes would drive away the high-end home theater installers who currently buy RTI's products. When the company launches the new remotes in June, they will carry another name: Pro Control.
Though gross margins will be a bit lower, Demskie expects higher volumes, which has allowed him to negotiate better manufacturing prices. "I suspect this could double the size of the business," he says.