By Howard Partridge
One of the worst things you can do in marketing is advertise price before value is proven. The most common type of price advertiser is the one that advertises a ridiculously low price but never intends to honor that price or there is only one in stock at that price. These price advertisers could also be categorized as a “bait n’ switch”. They bait the prospect with a low price to get them in the door and then once the prospect is generated, they switch them to what they really want to sell. In the worst case, the company would even refuse to offer the low price service which is totally a deceptive trade practice. Do you have bait n’ switch operators in your industry?
The bait n’ switch advertiser is only one of three types of price advertisers. The second is what I call the value choice. The value choice, unlike the bait n’ switch is a legitimate business model but has intentionally positioned itself as the lower price alternative. Think of how Southwest Airlines began in business.
They intentionally positioned themselves as the low price alternative and they were very focused about running their business model accordingly. Not offering meals on their flights, their point-to-point routes, open seating, and the revolutionary “10 minute turn around” policy have helped keep their costs down so they can offer lower fares and still make a healthy profit. This model doesn’t work for a small business that doesn’t have the scope or infrastructure that a large company has.
This brings me to the third type of price advertiser. The third type of price advertiser is the small business that doesn’t have the management infrastructure, the reach, and cannot handle the volume that a larger company can. Let’s think about a plumbing company. If a plumber were a smaller operator, why would he want to match the price of a bigger operation?
He can’t compete with their margins. He doesn’t have the management infrastructure, the capital, the brand image, and the television commercials that the larger company has. His revenue is generated by his sweat. Therefore, even though the overhead is lower, this person should charge more rather than less. The key is that this plumber must understand what differentiates him from the larger firm which we will get to in a moment.
Let’s look at a comparison between the smaller operator and the larger company. For example, let’s say this is the income statement of the larger firm:
-$2.5M Cost of Sale
=$2.5 M Gross Profit
-$2.0M Fixed Expense (40%)
=$500k Net Income
If a smaller operator who billed $200,000 has the same cost structure that produces a 10 percent margin, he would end up with $20,000 in profit. Not cool! And that’s what is happening in small businesses around the world every day! Obviously, there are lots of variables in this scenario but the point is that you can’t compete with the larger company on price.
Instead, the smaller operator should charge higher prices and leverage the benefits that a smaller operator can offer. So, the saddest cases of all the price advertisers are the small, independent business owners who just copy the big companies instead of understanding how to position themselves differently.
The bottom line is that price advertising attracts price shoppers. So don’t do that! Be intentional and educate yourself on your price point. This is a very important concept for smaller companies to understand. It’s not in the volume with any company; it’s in the profit. It is terribly important as independent business owners to understand this because we don’t have a national brand to generate leads for us. We have an entirely different set of benefits to offer which are worth far more.
Next month, I will share how to dominate your market and get rich in the niche. Until then, be phenomenal.
Howard Partridge, President of Phenomenal Products, Inc. and International Business Coach, is the author of 7 Secrets of a Phenomenal L.I.F.E. and 5 Secrets of a Phenomenal Business. Get a Free CD that reveals the 5 Secrets of a Phenomenal Business by visiting his website at www.HowardPartridge.com/SBT.