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Quit competing on price! Here's a better way to make A LOT more money (Part 2)

Quit competing on price! Here's a better way to make A LOT more money (Part 2)

April 07, 2011

We've been talking quite a bit lately with clients about pricing and while there may be plenty of books by marketing theorists and Ph.Ds about the subject, I can tell you the best place to learn about what works and what doesn't in business is to get out from behind the desk and see it for yourself.

Take my local fish market, for example. You have sellers and buyers all in one place exchanging goods for money. The Ph.Ds will tell you it's the quintessential marketplace and the seller with the lowest overhead and lowest prices will win.

I'm here to tell you, that's all wrong! It's no wonder that 80% of all businesses fail in the first 5 years if we have these types of people advising business owners.

I have a better way that will make you a lot more money...

Cutting costs is NOT the answer!
The idea is not to offer the lowest price or to reduce your overhead! The idea is to offer your market something different from your competitors that has a higher perceived value.

I call it creating a 'competitive bubble.' The goal is to put yourself inside that bubble so no else can be compared to you.

Take the fish market as an example. Every business person is selling fish. And every customer is deciding who to buy from based on only two things: price and quality.

For the seller, that creates a pricing trap and whoever has the lowest prices without sacrificing quality will sell more fish. That's not the game you or any successful business person wants to be in. Instead, you want to give buyers another reason to buy from you and pay you even more than your competitors.

The answer: Create a higher perceived value
You want a completely different measuring stick. Create packages and offerings that can't be compared. It's all about perceived value. What does that mean? That means that you create a product that's far more valuable than what it cost you to produce it.

Take the lesson Jeremy Shapiro learned as co-founder of Foreclosures Mass, a real estate investment service that specializes in the foreclosure market in Massachussetts. To help new clients get started, he and co-founder Sheila Farragher-Gemma held a one-day seminar for $495 and had about 500 people attend. At the next one, he increased the price to $595 and had even more people attend.

'If it costs more, it's got to be worth more!'
'So we said, 'Wait a second. Not only are we making more money per head, but we're getting more heads in the room,' Shapiro said. 'If it costs more, it's got to be worth more ' Not only were people OK with paying more money, more people would sign up if it costs more money, which is so counterintuitive to how I used to think.'

It's true. Most people equate higher prices with better value. In a survey of home furnishing buyers, for example, 84% agreed with the statement: "The higher the price, the higher the quality."

So what do you think Shapiro did next? Test selling the seminar at $995 or $1,995? Think higher!

'We tested the $6,000 price,' Shapiro said. 'We said, 'What the heck. Let's test this theory.''

They jumped the price up to $6,000, expanded the course to a 2-day event, allowed attendees to bring a guest and although they had fewer attendees, they made just as much money and brought in much more loyal clients who spent more money with them over the long run. 'I'm happy to have fewer customers and making a lot more money,' Shapiro added.

So many people go into business thinking, 'I'm going to do it cheaper' or 'I'll always have a business because I'm less expensive.' The problem with that is that there can only be one cheapes (think Wal-Mart). By the same token, there can only be one most expensive (think Gucci). And then there's everyone else in the middle.

So if you're not the cheapest and you're not the most expensive you must compete on something else ' and that something else is the value you offer in your competitive bubble. But how do you create a competitive bubble?

Good question! We'll answer that in our next edition of the e-letter.

Always taking you from where you are to where you want to go,

Jon

Jon Goldman, President & CEO 
Brand Launcher 
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