For starters, they do not understand how elastic price is. Only a small percentage of buyers of anything make decisions solely or predominately based on cheapest price. If more did, the Yugo’d be the car you see on the road most; no clothing store would exist but Wal-Mart. One of my favorite stories has to do with a client in the trucking business. At my urging, he raised the price for his service 200-300% in one leap, and changed his service territory from all of the United States to just a single traffic corridor where he offers superior service. He’d left millions on the floor in prior years trying to provide service to everyone.
Second, they do not understand people buy at different price levels. Yes, obviously, there is a Wal-Mart customer; probably in every category (although it is a big mistake to think Wal-Mart’s chief attraction to its customers is lowest price. It isn’t. It’s more complicated and clever than that. It has more to do with the social and entertainment experience.) But there is also a Nieman-Marcus customer, in every category. You can get a steak dinner at Denny’s, you can get a steak dinner at Morton’s. You can sleep at a Marriott Courtyard or a full service Marriott, or a Ritz Carlton. You pick your own clientele, so if you wish; you can certainly pick those for whom price is low on the totem pole.
Third, they try to compete on price. My preaching on this has been consistent for over 30 years: if you can’t be THE cheapest, there’s no benefit in being almost the cheapest. What kind of ad slogan is that? No sane single guy goes into a busy bar at Friday happy hour, climbs on a stool and loudly proclaims he’s the 5th best lover there. If you’re in a commodity business –get out. I mean: reinvent. Find another basis to compete on. One of my clients, who consults with the restaurant industry, just had me write an ad for him featuring one of his students; they own a gourmet pizza take-out and delivery shop, in a small city, where they compete with 127 other pizzerias. 127! And they are the highest priced of all of them. They do no 2-for-1’s. And they doubled sales and more than doubled profit last year. Key word: gourmet.
Fourth, they pay too much attention to industry norms. A lot of businesspeople look at what others are charging, the high, the low, and pick some place in between. Pfui. Selling should occur in a vacuum, and if yours doesn’t, you should alter your entire approach to the marketing that occurs before the sale so it does. Understand that everybody else has arrived at their price decisions through the same foolish process as you might now. It’s price incest, which works like regular incest; over time, everybody gets dumber. Also, there’s ‘price’, then there’s ‘presentation of price’, meaning structuring what you sell, how you package it, how you deliver it differently than everybody else, so you can price it differently, with direct comparison impossible.
Fifth, they live in fear. Any business decision made out of fear is a bad decision. Most business owners needlessly underprice, raise prices too little too late, and ignore opportunities to sell premium priced versions of their products and services entirely out of fear. Price paid is a result of target market selected, value built, value proposition presented, salesmanship, credibility, celebrity, brand, buying experience and many other factors. It actually has very little to do with objectively measured intrinsic value. If it did, diamonds would command no more than glass or coal. Because you can control and manipulate all the non-intrinsic factors, you should approach price courageously and creatively. One good way to grow courage is to make yourself very aware of what else your clientele spends money on, and how much it spends. Another is to make yourself aware of really affluent customers’ (or companies’) spending on a variety of goods and services.
In my previous trucking example, that business owner increased price as much as 300% and enjoyed an 80%+ acceptance rate from existing customers and tripled his business volume within 18 months, working in an industry where he is the highest priced provider. I think he offers a pretty good service. But I seriously doubt he’s 300% better than his competitors down the street or across the country, even though his fees are 300% higher. This dramatic difference between intrinsic, objective value and perceived value exists in every business, industry, profession, city and town. There’s always somebody successfully selling at prices or fees dramatically higher than everyone else, with a difference far greater than the objective difference that exists in the quality, competence or delivery. If one can, so can you.