Recently, I consulted with a couple of businesses who are producing a high quality product that clearly differentiates from their competition. In each case, the company's pricing strategy was to undercut their competitors in order to get a foothold in the industry.
If this sounds familiar to you, you are not alone. It is incredible enticing for most inexperienced entrepreneurs to want to pursue a pricing strategy that prices their new offering at or below their competition. While the typical reason given for pricing low is to gain market share, from my experience, it is really because the entrepreneur is scared to price their product too high.
While a low-price strategy can be effective for some types of businesses, it could be very harmful for a company that offers a product that is truly unique and better than its competition.
Price As the Communicator of Value
For starters, we all have a preconceived understanding of what price indicates, namely that price is related to quality. Of course, this is not true for everyone in every situation, but it is generally accurate. It is therefore very difficult -- arguably impossible -- to compete on both quality and price simultaneously.
Think about, can you find a brand or product that truly is the lowest price but highest quality in any industry?
So, if your product or service is truly better than that of the competition, and you have clearly identified and can effectively communicate this differentiation to consumers, then you should not be pursuing a strategy that is lower in price. You must include the added value in your price.
More important, as new businesses build their brand, and until they do so, consumers have only one way to quickly interpret the quality of their offering -- the price. If your lower price is the first thing that your new consumers see, there will be an interpretation of lower quality.
The Danger of Raising Prices Later
Some businesses will justifying pricing lower in order to quickly gain market share, arguing that they will raise their price later. This is not only difficult but could be potentially damaging to your brand.
Few things turn a customer away more than a price increase -- no matter the reason. Even if the reason is out of our control -- raw material price increase or trade tariffs -- consumers expect the company to absorb it. If a price increase in unavoidable, consumers will demand more value.
Pursuing a Premium Pricing Strategy
So what should a new business do? For starters, every business need to make pricing an critical part of the strategic planning process. Start by determining which pricing strategy you pursue, and as fellow Inc columnist Arianna O'Dell points out, stick with it.
If your company really produces a product or service that is clearly differentiable in terms of quality and value, than pursuing some level of a higher price strategy is best. Here are a few options.
Consider setting your price higher and offering "introductory offers" to get consumer to try your brand. This includes coupons, discounts and even free samples. In addition to getting the product into the hands of your consumers, it also makes them feel good to believe they are being rewarded for being early adopters.
Case study: Every app that is free to download but has in-app purchases, or those that offer an introductory trial period.
All products or services through history go through some iteration of the product life cycle, which is explained nicely by Inc columnist Andy Rachleff. While his example describes technology companies, for the most part, it is true for all companies over time.
Even if your company owns some proprietary asset, at some point, competition will figure out how to improve on your business and provide a better alternative. For this reason, all companies need to have a plan for dealing with products that will eventually transition from competing on quality and value to competing on price.
By managing your product portfolio with research and development, your company can ask a higher price for your product early in the life cycle, and then adjust pricing as competition moves in or new offerings become available.
Case study: Any company that produces products that consumers eventually upgrade, such as cars, mobile phones and televisions.
Consistent Premium and Niche Pricing
Lastly, an option you can consider is simply setting your price high and building a strong brand around the value you offer. This means understanding your consumers and staying true to your strategy.
This idea is risky for a couple of reasons. First, it is typically difficult and more expensive to build a brand based on value, and more important, if your product fails in any way to deliver on its value proposition, it can irreparably damage the brand. Second, by pricing higher, you will reduce the size of willing buyers, and although you will be earning higher margins on each sale, this idea can be difficult for entrepreneurs to stomach.
Lastly, it requires a great deal of confidence and courage to set a higher price and embrace the brand you want to build around it. With that said, if your company truly offers that value -- and you are confident and passionate about it -- then your consumers will reward your courage.
Case study: Premium luxury brands, such as those in clothing, such as Burberry, Versace and even Nike, that go so far as to destroy merchandise rather than put it on sale.
What do you think? What tips can you share about your pricing strategy? Please share them with us on Twitter.