Don’t Let Price be the Tie Breaker for your Products or Services
Have you considered offering “freemiums” (free products or services) to build your customer base? I encourage you to reconsider. Giving away a product or service, in hopes of gaining a following, often back-fires and results in a disappointing return on investment. The reason is that “free
” does not top
the average consumers’ buying criteria. In fact, a number of double-blind research studies aimed at pinpointing buying criteria have revealed that shoppers almost always place more value on attributes other than price
In support of this view, I’ll discuss the following proclamations to reveal how “freemiums” can lead to failure while relevant messaging
nearly always trumps the give-a-way.
Why Free Fails.
- Free or drastically discounted prices can actually undermine growth attempts.
- How to identify what your customer values most when making a purchasing decision.
- Explain the importance of constructing a relevant customer message.
Sarah E. Needleman’s recent Wall Street Journal
article acknowledges that many massive companies have enjoyed success by using the freemium model
to build a customer base - think Dropbox, Skype and LinkedIn. But Needleman cautions this approach due to the substantial probability of a back fire. This results when a company is not offering what their customers value
. Customer service, speed of delivery, quality of service, warranties, and a good return policy are just a few attributes that may be more valuable to your customer, other than the price of your product.
I believe the same thing applies not just to freemium offerings, but also to deeply discounted products or services. When companies don’t sell a solid value proposition, they often default to price as the tie breaker between themselves and their competition. This is a very dangerous approach. Identifying Buying Criteria.
How do you identify what’s valuable to your customer? Although customer satisfaction surveys act as report cards, they aren’t always the best way to determine what is valuable to your customer. This is because they only question customers about topics determined by the businesses management, which naturally neglects the consumer standpoint. For example, a survey question may ask, “On a scale of 1 to 10, how satisfied are you with delivery?”… The customer may answer ’10,’ because the delivery was facilitated flawlessly; at the same time, their buying criteria may be something completely separate, such as accurate delivery and/or accurate invoicing, but the survey neglected to ask about that. Fail to identify your customers buying criteria and you may as well delete your entire marketing plan.
A personal example: I recently purchased a garment bag/suitcase from overstock.com for work travel. I rarely make such purchases online in fear of receiving a product that was described improperly, and then end up having to pay 20-35% of the product price in shipping the item back. Overstock offered free returns, so I decided to take the leap and order. Low and behold – the bag was too big to carry on, but the description made it seem otherwise. When I went to make the return, I was informed that the return shipping amount would be withheld from my product refund because they were not ‘responsible’ for the reason of return.
So yes, shipment of the product to my home was great. Communication was efficient. Price was reasonable. But I would have paid more if my needs were being met. In fact, I purchased a bag from Macy’s at almost twice the price I paid for my Overstock bag, less than a week later. Overstock’s inability to fulfill the main element of my buying criteria – a hassle-free return – has lost them a customer.
I have heard countless sales people complain that ‘all their customers care about is price!’ Price is what the customer will fall back on if you fail to communicate relevantly
. "Offer me features that I want and I’ll buy it from you. Offer me what corporate has told you they think I want, and chances are you’ll have to sell it to me...and it better be cheap."
Start-ups and the Freemium Frenzy
Needleman recognizes that the freemium model is especially attractive to start-ups because of its potential to attract a large customer base, with the hope of converting them to paying customers. Needleman spoke with Vineet Kumar, a Harvard professor involved in a study of the freemium model, and noted that “the problem is, it's not always obvious what features should be free and which should be paid.” Kumar warns that offering too many features in the freemium version of your product or service risks "cannibalizing your paid customers." Offering limited features may result in minimal interest.
Don’t get me wrong, free or drastically discounted prices do
have a place in the market, if you’re Walmart. But unless you’ve established a distribution model so lean that it allows you to charge a lower markup then anyone else in the industry, then freemiums and discounted prices probably aren’t the secret to boosting sales.
The Case for Social Media
Is your company social? If not, it should be. Here’s why. The average American spends more than 60 hours per month online; that’s 30 full days per year. And according to a Nielson study of consumer on line behavior, 22% of all hours spent on line are dedicated to social networking. A third of all Americans are on Twitter, and half of all Americans are on Facebook. It’s time to use social media to your company’s advantage.
Social media is an ideal place to learn what’s relevant to your customers, and communicate your competitive advantage. Yet according to Melissa Korn’s recent Wall Street Journal article, seven in 10 Fortune 500 CEOs have no presence on major social media networks such as Twitter, Facebook, LinkedIn, Pinterest and Google+.
Fortune 500 CEOs who do have Twitter accounts have an average of 33,250 followers, according to a study by CEO.com and Domo. Korn states that brave CEOs, such as Yahoo’s Marissa Mayer, embrace social media and have been rewarded for it; however the fear of a bad post or misguided Tweet looms, and as a result, business owners large and small are missing out on the unbelievable opportunity to communicate their competitive advantage for free as well as the chance to learn about their customers and prospects’ desires.
5 Reasons Why You Should be Using Social Media
- Customer data.Obtain valuable customer data (for free!) and incorporate it into marketing approaches.
- Relevant message. Make your message more relevant by learning what is specifically of value to your customer.
- The competition. Keep your finger on the pulse of your competition 24/7. What new products or services is the competition involved in? What problems are their customers revealing?
- Customer interaction. Give your customer the chance to interact with you - build credibility and brand loyalty.
- Information dissemination. Spread the word quickly- your customers act as salespeople for your company, generating buzz about your product, service or event at lightning speed.
Ready to exploit the benefits of social media? Here are a few tips.
The Dos and Don’ts of Social Media
- DO let followers know of recent product releases and major happens; DON’T bombarded them with this info every day.
- DO share awards and consumer praise; DON’T bash the competitors.
- DO give a peek into your personal life; DON’T share your life story.
- DO talk about how current events tie into your company’s competitive advantage; DON’T discuss current events like politics.
Social media can be your megaphone; reaching out to customers around the globe. Competitive advantages are worthless if your marketplace doesn’t know about them. Social Media provides the platform for shouting your differentiators from the rooftops!
A recent article in the WSJ on the ascendance of Spirit Airlines highlighted many of the features that have come to represent the race to the bottom in the airline industry:
- No more meals, drinks, or service of any sort
- Pay extra for luggage, checked and carry-on
- Less leg room/comfort
- Poor on time performance
Spirit is the airline version of a low-cost competitor. In fact, their market niche is defined in the WSJ article as being “ultra-low cost.” Every market has their version of a Spirit Airlines. In construction, they’re the company who win bids by quoting a price so low that they can’t possibly make money, and then adds change orders that continually raises the total price. Need your car’s oil changed? Spirit is the equivalent of the oil change place that offers $9.99 oil changes, and then charges $15 more for oil designed to work in your car.
Ultra low cost providers can be frustrating to long-time stable businesses because their sales tactics so often work. Many buyers are enticed by the low up-front cost, and fail to consider everything else that goes into the transaction.
As someone who travels quite a bit, I’ve flown Spirit. Like everyone, I was enticed by the low cost, but there was another factor that influenced my decision to try them. When I had flown other low cost airlines such as Jet Blue and Frontier, I had decent experiences. In fact, with Jet Blue, I had free access to TV the entire trip – something I have to pay for with many of the legacy airlines like United, American, and Delta (that’s if they even fly planes that have TVs, which seems to be rare). My perception of the airline experience was that once you got on a plane, there really wasn’t much difference between any airline.
Until I flew Spirit.
Every airline seems hell-bent on giving you less leg room. This trend is part of what makes a supposedly higher-end airline experience feel like a low-end experience. A Spirit seat is extremely uncomfortable. Like many buyers, it wasn’t until I tried the low price provider that I understood the full value of what I was getting before.
After flying Spirit, I began to look at flying and have asked myself – what else am I willing to pay extra for? Herein lies the problem for the airlines, as my list is surprisingly short:
- Frequent flier miles
- Flight schedules
- Non-stop, or direct flights
Some of the other items that I wouldn’t be willing to pay more for include:
- Baggage check-in
Stop Differentiating - Start Selling Relevance
Take baggage fees as an example of a differentiator. Southwest has an ad campaign built around the fact that they don’t charge baggage fees. Am I willing to pay more for that? As a business traveler, I rarely check in a bag (I almost always carry on my luggage), so the fact that some airlines charge a fee whereas others don’t doesn’t factor into my buying equation. This doesn’t mean the Southwest campaign isn’t effective in pointing out a differentiator. Were my priorities correlated to those of the buying public, Southwest’s ad campaign would be a perfect example of what Jaynie Smith says in her new book, Relevant Selling, “differentiators are not competitive advantages unless they are relevant to the customer.”
This year the cost of a 30-second Super Bowl ad was $3.5 million – up from $3 million the year before. Since 2001, the price of a Super Bowl ad has gone up by 59% (from $2.2 million per 30-second spot).
The ever-rising price of a Super Bowl ad is another sign of why it’s wrong to try to compete on price. Even in a down economy, it is possible to raise your prices if your customers value what you offer and if you know your competitive advantages.
We tell this to our clients all the time: “Price wars have no winners.” If your only way to compete is to cut your prices to the point where you can barely make a profit, then you need to re-think the game; or find a new market to play in.
If you look at the example of the Super Bowl, the customers who buy Super Bowl ads (marketers – ad agencies and the companies that hire them) clearly are not “price sensitive.” Most companies would think “it’s crazy to pay $3.5 million for a single 30-second TV ad,” and yet the Super Bowl TV ads were all sold out.
Why are customers willing to pay almost any price for a Super Bowl ad?
3 Competitive Advantages of the Super Bowl in the TV advertising market:
- Unmatched audience and reach: Super Bowl ads are guaranteed to put advertisers in front of millions of eyeballs (this year’s Super Bowl was watched by 111 million Americans) and the ads get additional attention from news coverage, viral campaigns and social media commentary about the commercials themselves. The Super Bowl has become an unofficial national holiday dedicated not only to football, but on a smaller level, to advertising itself.
- Prestige play: Buying ad time for the Super Bowl is often a sign of prestige. By buying a Super Bowl ad, big companies can show that they have powerful brands with mass audience appeal, and emerging companies can get a big splash of media attention. Running an ad during the Super Bowl sends a signal that a company is willing to be a big player in the media landscape.
- Nothing else compares: There is only one Super Bowl. No other TV advertising opportunity is quite like it. If you want to put an ad in front of millions of highly focused consumers who will be more likely than usual to actually watch and remember the ad, the Super Bowl is the time to do it.
For all of these reasons, it’s no wonder that the Super Bowl can charge whatever they want for ad time.
Where do you offer something specific that can’t be found elsewhere that is perceived as very relevant to your customers? What will make your customers feel like they got something very special? How well does your company communicate that?
If you can you give your customers an unmatched, one-of-a-kind experience, and communicate your competitive advantages in your marketing messages, you’ll be able to command more profitable prices, year after year.
One final thought on the Super Bowl: It’s obvious that the Super Bowl is a good business for the TV networks that broadcast it, and although the Madison Avenue advertising agency world always gets excited about Super Bowl Sunday, I’m not convinced that these Super Bowl ads are actually a smart use of money for the advertisers themselves.
Do most of the companies that advertise at the Super Bowl even know what their ROI is for their Super Bowl ads? Or are these companies’ ad agencies selling their clients on expensive ads based on the nebulous concept of “brand awareness,” which is hard to calculate and hard to value? I personally find very few ads that deliver a message of relevance. I am not going to run out and buy chips because some sloppy guy is licking his fingers after devouring a bag. Did that send you racing out to the store? I surely didn't.
Why You Need to Develop Your "Elevator Pitch"
We’ve all heard the concept of the “elevator pitch.” If you had 30 seconds riding in an elevator with someone who was crucial to the success of your business, and you had one chance to sell yourself, what would you say?
How can you succinctly encapsulate the best attributes and key points about your company, in 30 seconds or less – without being too wordy, too aggressive, or too overwhelming?
If that idea sounds daunting, what if you had to shorten that speech even further?
You see, the world moves too fast now for elevator pitches. No one has time or the attention span for a 30-second pitch. So one of the things our business consulting services provides to clients is identifying competitive advantage statements – “elevator sentences,” you might say.
These are concise, tightly worded, and rigorously defined positioning statements of the key competitive advantages of your company. This is how you can present your company with confidence and explain what you do best – and most importantly, show why it matters to your customers.
Competitive Advantage Statement Examples (AKA Elevator Sentences):
- Our technicians solve problems in less than 2 hours.
- Our consulting firm helped clients raise over $50 million in venture capital during the past year - a 10% improvement in a year when the industry as a whole was down by 20%.
- Our HR training program helps clients improve their employee retention rates by at least 30%.
- Our law firm gets over 85% of business from repeat clients.
- Our car wash delivers the highest water pressure and longer wash times than any other competitor in town.
- Our interior design team stays on budget 95 percent of the time.
- 90 percent of our business comes from referrals and repeat customers.
- Our gym program has an average of 15 pounds lost in 5 months for over 60% of our members.
Developing Your Competitive Advantage Statements
All of these competitive advantages are concise (one sentence). They are specific – focused on one unique attribute or achievement of the company. And, given, they are relevant to the customers (conduct Market Research to find out).
If you want to get your car washed, it’s relevant to you if one car wash can give you a more powerful spray – and more washing time for your money.
Talking about repeat business and referrals builds credibility. Explaining about how you can outperform your industry or stay on budget 95% of the time helps your customers understand your unique skills and dedication to delivering value.
Smart Advantage business consulting services has helped clients develop their own “elevator pitch” – short, concise, evidence-based statements to encapsulate and promote their own competitive advantages. We do this by meeting with the company’s top leaders, where we brainstorm, discuss and drill down into the fine details of what makes the company unique.
In Chapter Two of Creating Competitive Advantage learn how a commercial realtor replaced his "Elevator Pitch" with his competitive advantage statements - and ended up getting $38 Million of new business. We guarantee to our clients that they will uncover 50-100 competitive advantage statements they did not even know they had!
Smart Advantage can give your company a new vocabulary to describe what you do best, how to measure what you do best, and how to convey that information to your customers in a way that is relevant to them.
The best businesses to be in are the ones with high barriers to entry.
Think about it – why do doctors and lawyers and dentists earn so much money? Because there are barriers to entry – medical school, the bar exam, dental school – keeping people from getting into these professions. That keeps the supply scarce – we can’t all be doctors and dentists and lawyers.
Professional qualifications are one type of barrier to entry. But have you considered that your business might be able to create its own barrier to entry – that is built on your company’s competitive advantage?
If your company truly understands its competitive advantage, you can “build a moat” around your business – you will establish such a lead over your competition that no one else will be able to beat you in your market. Competitive advantage creates scarcity in your market; just as “not everyone can be a dentist,” if “not everyone” in your market can do what you do, that makes your company even more valuable.
Just as “the only dentist in town” can earn a great living because of the barriers to entry keeping people out, your company can become “the only” one in your market – if you understand and embrace your competitive advantage, and become widely respected and recognized as “the best” at what you do.
For example, if your company can offer the following results, you might have a significant competitive advantage to share with your customers:
- Guaranteed on-time delivery. Can you be more reliable than anyone else – and are you prepared to bet money on it?
- Same-day service. Can you be faster than anyone else in your market?
- 99% success rate. Can you be more accurate than anyone else in your market?
- 24/7 on-call service. Are you able to go the extra mile to be available when your customers need you?
- The “wow” factor. Is your product or service so much better than anyone else that your customers feel compelled to talk about it with others? Do you get a lot of word-of-mouth business and referrals? If so, you’re doing something right – and you have a significant competitive advantage.
Internal Competitive Advantages
In addition to these “external” competitive advantages, there are also “internal” competitive advantages. These take a long time to develop, but they are often the best way to build a “wide moat” around your company.
For example, Walmart is a wide-moat company – no one is ever likely to beat Walmart at low-price, mass-market retail. Walmart’s biggest competitive advantages are internal – it’s sheer size, its logistics, its buying power. Customers at Walmart don’t see Walmart’s elaborate network of warehouses and its skill at distributing the right products to the right places at the right time; but they benefit from it in terms of lower prices.
Similarly, Coca-Cola has an almost insurmountable lead in the beverage industry because of its worldwide distribution – almost anywhere in the world, you can buy a Coke. Coke is able to enjoy this competitive advantage because of its internal capabilities – its powerful distribution networks and its canny marketing ability to find and capitalize on new markets for growth (such as China).
Smart Advantage helps companies who are not (yet) the Cokes and Walmarts of the world to uncover their true competitive advantages. You might not have a universally recognized brand (like Coke) or massive scale to bargain with your suppliers (like Walmart), but we can use market research and strategic insights to uncover what it is that makes your business competitive in your market.
Some companies are able to pinpoint their own competitive advantages internally, but it is more often the case that companies don’t know their own strengths – it takes an outside observer to help them identify their true competitive advantages.
As highly-competitive manufacturers and retailers become lost in a sea of sameness in the eyes of consumers, it is up to the brand to catch the focus of consumers’ eyes and differentiate from competitors.
Following the introduction of the Apple iPad, Hewlett-Packard began discussing setting prices on its anticipated PC version of a tablet to directly compete in price with the Apple iPad.
While Hewlett-Packard could easily uncover and tout its competitive advantage against Apple – for example, amidst the popularity of the iPad, HP’s disruptive technology in an emerging competitive marketplace for tablets holds a strong value in consideration of the demographic preferring PCs over Macs – HP plans to cut below the prices Apple sets for is iPad tablet, and Apple is prepared and financially able to fire back at the first shots in an all-out price war.
While engaging in a price war looks to be the best step in gaining consumer attention, it’s the first step to the bottom of the profit margin ladder, preventing an entire industry from maintaining a competitive position in supplying consumer demand at a profitably-set price.
Through means of specific differentiation focusing on product knowledge, unique customer experience and an overall outstanding set of customer service accommodations, a brand increases the specific value brought to customers in the transaction, maintaining and creating competitive advantage outside of engaging in a price war.
Great examples abound in manufacturing and technology: one company jumps into the slippery slope of lowering prices to compete, and with it drags an entire industry down. Apple iPad struck up a price war with publishers competing for maintaining a higher price, resulting in a reverse price war on e-Books. Toyota’s competitive advantage was a strong, forward message; if Toyota is wise it will maintain a competitive position through customer service and how it handles the recent recall.
E-Trade cut broker prices, and brought with it the entire trade brokering industry to level the playing field at the cost of an overall loss of profits. Once a company offers a product or service for a low price, it is nearly impossible for it to justify an increase in price later on. Maintaining a competitive advantage against other companies without engaging in a price war yields higher profit margins and increased market share value.