If it were true that the only thing consumers care about is price, then the arrival of a Wal-Mart would automatically kill every other business in a town. And though popular opinion suggests that this is the effect of Wal-Mart, studies (Artz & Stone 2006; AAEA 2006) have found that although the introduction of a Wal-Mart Super Store has a negative effect on rural retail initially, after two years the Wal-Mart effect dissipates. One of the lasting results of the Wal-Mart effect seems to be generally lower prices in a market, but it is difficult to discern to what extent lower prices are driven by Wal-Mart versus by a trend toward lower prices in general.
Of course, consumers do care about price. Ask them what influences their buying behavior, and they’ll tell you that price is the thing they care about most. Follow them around and study what they do, however, and you’ll discover that price is just one decision-driver, and generally not the most important. Why do consumers say price matters most when their buying behavior does not support this? No one is quite sure, but market research professionals suspect two factors: 1) consumers feel guilty about the amount of money they spend, and so report heightened virtuousness relative to price consciousness; and 2) faced with a sea of sameness across all consumer product categories, the only differentiator consumers experience in most cases is price, so price stands out.
I won’t even attempt to address consumer guilt, but I find the second issue to be of significant importance to small business owners – particularly those competing in luxury markets.
When a company fails to establish compelling reasons to buy its products, it is reduced to competing on price. This is market reactivity as a form of strategy, and it’s an excellent formula for going out of business. The only time competing on price is effective occurs when competing on price is the strategy. Wal-Mart’s strategy is price. Part 1 of the price game looks at all product competitors within a particular market and prices against them. That’s the easy part. Part 2 of the price game develops strategies for reducing the costs of operations and products to protect margins once prices are dropped. To build an organization that can successfully compete on price, a company must focus all energy, resources, and capital on creating systems and supply chains with maximum efficiency – all costs must be rigorously controlled and the rate at which products and cash move through the system must be very high. This strategy is out of reach for most – if not all – small business owners. Unfortunately, most small business owners play Part 1 of the price game, but lack knowledge or capital to play Part 2. The result is reduced cash flow and a fight for survival. So what’s a small business owner to do?
Consider playing a new game, a game that also has two parts.
Part 1: Develop a strategy that does not depend on price to attract customers. A good strategy considers multiple elements. Most business owners focus on the what I have to sell element exclusively, but that element is too limiting. What other compelling reasons to buy can you offer?
- Do you have specific knowledge of your customers, knowledge that significantly improves the customer experience?
- Do you eliminate any undesirable effects, making your company or product perform better than competitors?
- Does your product or shopping experience save your customer time, improve his or her ability to make a decision, reduce your customer’s risk, or contribute positively to his or her self-image?
- Can you sell your product in a way that solves a problem, creates new opportunities, or improves the shopping experience for your customers?
- Can you offer any exclusive benefits?
- Do you offer complementary products or services that enhance your overall value?
The process of determining three or four distinct strategic elements around which you will build your brand, on which you will base your selling and marketing strategy, and through which you will differentiate your company in the mind of your customer is the process of strategy. Good strategy is the first defense against mindless price competition.
Part 2: Look beyond the usual competitors. Business owners tend to assume that consumers are choosing between two similar products from two direct competitors. Let’s meddle with the sacred cow of the jewelry industry for a moment – the diamond engagement ring. When a young man prices a diamond engagement ring at Blue Nile, JC Penney, and the local independent jewelry store, is he creating a competitive space among diamond engagement ring sellers? Yes, he is. But are Blue Nile, JC Penney, and the independent retailer the only competitors in the arena? Definitely not. The other competitors are the florist, the cake baker, the wedding dress maker, the travel agent, the tourism promoters of a variety of potentially interesting honeymoon destinations, and (perhaps most important) the buyer’s self-image.
But wait! That’s not all! The diamond engagement ring seller is also competing against the restaurants the young man may choose not to eat at, the movies he may choose not to go to, the stereo equipment he will defer, the real estate agent showing him apartments or houses, and the iPad he wanted for his birthday. Most independent jewelers accept that selling on service is the alternative to selling on price, but after that, they run out of creative ideas for how to sell that idea. Part 2 of this game is NOT about trying to compete against all of these interests with every sale because that will just drive you crazy. Part 2 is about recognizing the full range of potential competitors, then crafting a compelling offer and image that sets your business apart in the mind of your potential customers.
This new game requires creative thinking, knowledge of strategic planning, the ability to project how various ideas will play out in the market, and ultimately, the willingness to make a choice about strategy and brand and then stick with it. The reward for a well-managed strategic process is the ability to run a business that is largely impervious to price competition. You’ll still have to price for value because consumers will always care about whether or not they are getting good value for their money. But pricing for value is a game you can win. And ultimately, that’s the only kind of game you really want to play.
© 2010. Andrea M. Hill