When we owned Tri Shop, pricing strategy and our place in the market was a frequent discussion. One piece of advice we received stands out:
"Always remember, you are a 'for profit' business. Someone else will always charge less."
Seems obvious, but there is real insight buried just beneath. Being the cheapest option is the easiest strategy to guarantee sales, but its also the hardest way to make a profit. And its profit that pays your bills, pays your rent, pays your employees, and pays your way.
Most discussion about price and pricing strategies focus on profitability and sustainability. But your pricing strategy goes much further than that. It tells your customers who you are.
Your price is a statement of quality.
The consumer mind is trained to assume that the cheapest option is likely the lowest quality option. It doesn't matter whether you're selling enterprise software or tacos. Prospective customers will inevitably assume quality is compromised when you're cheap.
Some companies go to great lengths to avoid this stereotype. Apple, for example, fiercely enforces pricing policies to ensure nobody sells an Apple product cheaper than what Apple allows. Despite comfortable profit margins, they don't discount their products because they don't want to impact customers' perception of value.
That doesn't mean there isn't a market for cheap products. People still buy cheap computers, cheap phones, cheap hamburgers, cheap cars, and even cheap medicine. Because sometimes people want something thats just good enough to meet their needs.
Are your products and services good enough or are they premium? Your price is how new customers will be able to tell. Your price isn't just a statement of value, it's a statement of quality.
When your price is the lowest, that's what customers remember most.
We found that customers at the high-end of the market were explicitly interested in the things we were best at - service and expertise. When we delivered on our promise of service and expertise, that's exactly what our customers remembered. And word-of-mouth spread: "if you want it done right, go see those guys."
When you're the cheapest option, that's virtually the only thing people remember. Your customers will tell everyone about the "great deal". And if they come back, they're coming back for the same "great deal". My experience tells me this is true irrespective of the customer service they received or expertise you provide.
The right pricing strategy doesn't guarantee success.
While I've written here about Tri Shop and why we closed, I don't believe we had the wrong idea about price and our place in the market. We held our pricing at Tri Shop for the most part, only occasionally bending to the pressures of an expedient sale. And when we did bend, we found out the hard way that when customers are conditioned to receive special pricing there's no going back.
In retrospect, our premium (but competitive) pricing strategy was a big contributor to our success and didn't play a role in our failure. If I had to do it over again, I'd be more deliberate at putting a premium price on the premium experience we provided, even if it meant losing sales to lower priced competitors. Our pricing and sales strategy fit our business, fit our motif, and attracted our target customer. It even helped us recruit and retain talent, as the best employees want to work wherever the best work is being done.
And if you think about it, pricing strategy transcends business ownership and startups. In your own career, the compensation you demand for your time tells employers what type of value you think you provide. Price yourself too high and you risk pricing yourself out of the market. But price yourself too low and you risk telling the world you probably don't do great work.
What you charge tells the world what you think you're worth. Price yourself accordingly.