An entrepreneur I was speaking to was telling me about his experiences between the time he first started in business and now. He started as a low-cost provider and just recently he has made the decision to move upscale and become the high-cost provider. It has required a number of changes but he is thrilled with his decision, it worked well for him.
In building your business, you want to get more clients so that you sell more products, earn more income, and enjoy a higher profit. But in planning your business, do you choose to be the high cost provider or the low cost provider?
(Yes, it’s true that there is a middle ground you could choose as well, but clients tend to polarize you into one of the two camps. If you are not the lowest price provider of the product or service, then price-conscious buyers may feel you are a higher priced provider and they’ll avoid you. If you are not the highest price provider, then value- conscious or exclusivity-conscious clients may feel that you are the lower priced provider and they’ll avoid you.) Because this is a “darned-if-you-do, darned-if-you-don’t” approach, let’s just look at the pros and cons of being both a high price and low price provider to help you adequately plan your business’ niche.
Pros of being a low price provider
- There are many price-conscious buyers.
- Coupons are an easy, inexpensive way of marketing and they offer a highly measurable way of tracking your advertising effectiveness.
- In up or down times, you can generally be sure that customers want what you sell.
Cons of being a low price provider
- There’s a very true saying that says “someone can always do it cheaper” which suggests that you will experience cut-throat undercutting.
- Your products have a lower perceived value in the customer’s eyes.
- Your profit margins can be razor thin.
- Price-conscious buyers can be demanding by “requiring” more value than the product is worth.
Pros of being a high price provider
- Your product has a higher perceived value.
- Your profit margins are generally healthier.
- There is an element of exclusivity that (depending on what you sell) will still attract people who are normally price-conscious.
- There are many buyers who prefer a high-value product over a low- price product.
Cons of being a high price provider
- Depending on your product, a down economy could reduce your revenues.
- Prestige-conscious buyers can be demanding by expecting the red carpet treatment.
- Your products or services must be truly worth the higher price you’re asking, which may not mean better quality but should at least provide better value and service.
There are many companies that succeed as the low cost provider. Wal-mart strives to provide low cost retail products. Enterprise Rent-A-Car strives to be the low cost rental car company. They are successful but you can be sure that it’s not without its challenges.
Your industry and sales skills will ultimately determine what you need to do, but my experience has shown me that the opportunities of being a high cost provider far outweigh the challenges.
