As mentioned in my last post about the secrets to selling high priced products or services, you can only sell a high-priced product or service if you don’t sabotage yourself by limiting your achievable prices through a poorly devised overall business strategy. And as promised, that’s what I’ll go over in today’s post.So today we’ll go over:
- What really sets the limit to what you can charge for your products or services.
- What really is beyond your control and what isn’t (because you probably have more control than you think).
- What you can do to avoid having to sell your products for dirt cheap prices.
So, without further ado, let’s jump into it.
To begin, your prices can be pressured down by aspects at 3 different levels:
- By what happens in your industry (that is, the competitive landscape into which you launch your products or services).
- By what you do (that is, by your business strategy).
- By macroeconomic and socioeconomic factors (that is, the overall economic environment, and the social group of the customers or clients that you target).
But let’s break these down one by one, and see how they limit your prices, and most importantly, what you may need to change in your business strategy, and how you may try to avoid being clobbered by external circumstances outside of your control.
How the industry you're in may limit your achievable prices
So, there are several things that put pressure on your prices that are inherent to the industry you are working in.
Depending on your industry, you may find:
- A higher or lower number of alternatives to your product or service
- Different levels of competitive aggressiveness among your competitors
- A higher or lower negotiating power on the side of your potential clients or customers
Again, one by one, and how to address them:
Pressure imposed by alternatives to your product
This is the most obvious one, and the one that everybody immediately thinks of.
Because we do think about prices in relative terms.
We usually judge whether a price is fair by comparing a product’s price vs. another product’s price (or an industry standard price), and judge whether the difference in price is justified by the difference in value.
So, when alternative products or services to our own are priced low, it becomes harder to justify a high price, because the difference between our product’s price and the alternative one (usually referred to as price premium) is relatively… BIG.
The less we differentiate, the more limited our prices will be by those of similar products.
And this is why the prices of products or services that can be used instead of ours pressure and may even cap the achievable prices for our own product and/or service offerings.
The more similar the alternatives are, the easier it is to substitute one for another, and therefore the products vs. price comparison becomes difficult to avoid.
So, the way to move away from this sort of pressure on price is to make our products and services hard to compare and substitute. That is, to avoid having our price potential capped by the prices of the alternative products, we need to differentiate our offering.
Because if we offer a different product, comparing prices and substituting isn’t as straightforward. Therefore, the pressure on price is relieved.
The problems here arise when businesses decide to grow by taking business away from competitors, and they use price as an attack weapon. That is, they try to get customers from rivals by offering lower prices than the competitors do.
And unfortunately, it may only take one idiot to start an industry-wide price war, ruining the market for everyone.
Evidently, this is more likely to happen in mature markets in which growth is small, inexistent, or even negative, and competitors abound. In these situations, growth does have to come at the expense of someone else’s business.
The more intense the rivalry in your industry, the more likely it is that competition will turn to price (since it is the easiest and laziest way to compete). So, that ends up pressuring achievable prices.
However, at the end of the day, this issue is nothing more than a competitor-induced intensification of the natural pressure imposed by the existence of substitute products or services. The more similar your offering is to that of rivals, the more likely that you are affected by their actions, since their products’ prices are stronger references for your own.
So again, the way to fight this one is by differentiating, and trying to stay as far away as possible from competitors engaging in destructive behaviors.
This is one of those situations in which the saying that “different is better than better” is worth keeping in mind.
Because when it comes to being the cheapest, there can only be one. And there can also be only one all-around best product, which is very hard to achieve (when at all possible, since “best” is so subjective). However, being the best at one particular thing may be not only a lot more feasible, but also protective when it comes to competitive attacks putting pressures on your prices. Because nobody is as good as you at that particular thing.
Customer negotiating power
This one is kind of evident: the smaller the number of clients and/or potential ones, and the larger the share of your business that goes to each client, the more imbalanced the negotiating power will be towards their side.
If clients know that they play a large role in your ability to make money, they can demand more concessions from you in negotiations, including requesting lower prices.
Unfortunately, this is one that is hard to fight. Saying that you should go get more clients is just dumb (it’s like… you go bell that cat; I realize that).
You would if you could, without needing anyone to tell you that.
In any case, do keep it in the back of your mind if you’re ever in a position of having to choose between putting your efforts into signing a new client, or into getting more business from an already large one.
So, when it comes to industry-imposed pressures on price, differentiate, differentiate, differentiate, and try not to put all your eggs in a handful of client baskets.
How what you do internally may limit your achievable prices
Ok. So, there’s a lot to be said about how your business strategy will limit your achievable prices, but broadly speaking, I’d say there are two main sources of potential issues:
- How you define and implement your value creation, value communication and value capturing strategies.
- Who you choose to target.
Regarding your value creation, value communication, and value capturing strategies (what I like to call the revenue maximization triangle), I have linked a post just on those in case you want to read more.
Although they really are super important, I’m not going into them here, as this is already too long as it is, and they are explained in that other post.
So, let’s jump right into how a poor targeting strategy will limit what you can charge.
Here’s the thing: when you define who your product is for, you may be unwillingly capping your achievable prices.
For example, you must be conscious that when you target a population with a lower available income to spend on your type of offering, their ability to buy your products or services will not only be limited by their willingness to pay, but to a large extent by their ability to pay.
And this is something that seems super obvious when said like this, but a lot of people seem to forget it when they actually develop their products.
Let’s say that you are creating products for millennial women with small children. You cannot expect to achieve the same price ranges if you create a product targeting professional women who want to advance in their careers, than if you create a product targeting stay at home mothers who want to save on household expenses.
And as long as we’re on this topic, targeting people who want to save is also a bit tricky, because their frame of mind isn’t exactly “let’s open up the wallet!” to begin with.
So, things like available funds and likely frame of mind, especially in terms of optimism or pessimism regarding their future financial conditions should be considered when deciding who you want to target (people with positive outlooks regarding their future tend to be more willing to invest than those that fear for their future financial stability).
And these are very important aspects when it comes to bringing a product to market, because even though they have no direct impact on the value that your product creates for the buyer, you may not be able to capture that value, because the people you want to sell it to just can’t afford it, or aren’t inclined to invest.
How macroeconomic and socioeconomic factors may limit your achievable prices
Evidently, you cannot change the macroeconomic environment, nor your customers’ socioeconomic situation.
The only thing you can do, is to target customers who are less likely to be affected by a negative turn of events, or that have more income and willingness to invest in your offering to begin with.
Also, keep in mind that unfortunately, less affluent groups are often the ones that get hit harder whenever the economy isn’t performing great. So that’s an additional source of risk for your business if you choose to focus solely on serving populations with higher pressures on their income.
Note that I’m not saying that these groups aren’t good potential markets to serve. This post is about price ceilings, not market attractiveness. That’s a different analysis. They can absolutely be great markets. But, when it comes to limiting price potential, the socioeconomic groups you target do impose limits.
Anyway, the key takeaway here, is that in order to avoid market-imposed price ceilings, you must try to differentiate in a positive manner. When it comes to protecting prices, different is often better than better.
Then, you must develop solid value creation, value communication, and value capturing strategies for your product and/or service offerings, so that you are able to develop and sell products that people want to buy at a price that is profitable for you. (Again, I suggest you read the post I mentioned earlier).
It’s also important to try to diversify your clients to avoid an excessive imbalance of negotiating power towards their side.
Finally, you must be mindful regarding the socioeconomic conditions of your target customers, as well as their likely attitudes towards spending money/investing in a product like yours, because those aspects usually create price ceilings that are hard to break through.
And that’s it for today! I hope it was helppul!