When I think of product or service “pricing traps”, I naturally think of the homebuilding industry. In the homebuilder’s effort to make something happen, and not just in today’s difficult selling situation, there seems to be the tendency to stumble into the same pit . . . um, pricing trap . . . as our competitors.
Although the peril of pricing traps applies to virtually every industry, let’s use homebuilders as an example. If you’re not in homebuilding, just take a moment to think about your industry’s strategies with regard to pricing and market positioning.
All things being similar, i.e., size, location and, to a degree, features, which are the differentials that separate one home from another, Homebuilders have three pricing strategies. The homebuilder can position their company, and homes, to be:
- The lowest priced in the market
- Priced somewhere in the the middle of the competition
- Or demand a higher price than those of the competitors.
The Pyramid of Pricing
Most of us are familiar with the Pyramid of Pricing, shown above, which illustrates that as price goes up, the number of buyers able to purchase goes down. Simple economics and the affordability index: the more things cost, the fewer the people that can afford them.
Because the market share of buyers are greater at the bottom of the pyramid, obviously more people can afford the $130k home than the $330k home, so homebuilders can make a good case for developing a strategy of building homes that are targeted to the majority of buyers. Flip open your laptop and browse through one of the on-line real estate networks, and you’ll clearly see the pyramid of pricing by noticing that there are a great many more new homes being offered at the lower end of the price spectrum for a given market than the mid-to-higher priced homes.
However, if the homes are similar in size, location and features, competing in the marketplace as the “lower priced” builder may not be the best strategy.
There is Nothing Unique About Pricing
The difficulty with positioning your company, or your product based solely on price is that it doesn’t give you much of a selling position from which to operate, for there is nothing unique about pricing. You are either the lowest priced product or not, and every day someone can, and will, ’beat you up’ on pricing. If it isn’t the prospect looking for a “deal”, and trying to beat you down on your pricing, it’s your competitor beating up their suppliers and vendors to get their prices lower than yours.
In the case of homebuilding, it’s your competitors getting the subcontractors to do it for 5 cents, $5, or $50 less as well as employing other cost cutting measures to get their prices down below yours. The larger, national builders with their national purchasing abilities can strike a lower priced deal with their vendors and suppliers better than the small to mid-sized homebuilders.
Homebuilders know exactly what I’m talking about. If you build 100 homes a year, you aren’t going to get the same price as the company building 500 homes a year, nor will he get the same deal as the firm selling 5,000 homes a year.
If your strategy is to be the low-priced homebuilder in the market, the struggle to remain the low priced builder will take more time and energy as you fight to remain the lowest priced. You think you’re going to make it up on volume, but in essence, the energy and brain damage you give yourself to produce volume will actually produce an overall lower return on your assets (think people as well as other resources) and investment than other more reliable, dedicated marketing strategies and business practices.
When I think about low-priced business model companies that have been pushed out of the market by someone who did it better, I think of:
- Kmart, once a retail giant, who virtually self-destructed. Taken over, Kmart has now emerged from bankruptcy, but is third to Wal-Mart and Target
- Woolworth, which despite being the largest chain in the US went out of business and was replaced by companies with a better business model, such as Wal-Mart, who added a grocery line.
- Close-out specialist Pic N Save, a staple in the industry, was replaced by Big Lots.
I can also think of a few builders that have come and gone or been taken over, and I’m sure that you can too.
Be the Price Leader Operating from a Different Position
If your market strategy is that you are going to be the low-priced builder, give yourself another position from which to operate. Be the builder with the highest integrity and commitment to your customers and employees. Provide amazing customer service to both your internal and external customers.
Explain your business model thoroughly to your employees so that they will champion your cause to be the market price-leader. Empower them to make the right decision for both the customer and the company. Better employees, the ones you want to retain, become frustrated when not given the opportunity to perform at their peak and do the right thing. Companywide, the price to be paid when employees don’t fully understand the low-price business model is the perception that the organization is being cheap with both the customers and ultimately, with the employees. Poor moral is not a winning situation for you.
Explain your business to employees. Don’t make the mistake of thinking that because they aren’t in the executive suite they don’t have great ideas or a passion for your business and industry. Build a team by involving them and rewarding them appropriately. Guard that you do what you say you will, especially with employee compensation packages. Set the goals high, but make them achievable, and don’t penalize the employees by renegotiating with them when they do hit the marks you set.
Please, don’t ever tell an employee that they are making too much money. If you’ve set your compensation plan up correctly, and your team is making a lot of money, well that means you are too! Don’t begrudge them the prize.
We are taught that good sales and marketing starts with you defining your unique selling proposition: so start there.
What do you have to offer better than your competitors, other than price? Generally, as the price leader, it’s going to be value, both through your product and your people, so start there.
For homebuilders, start by building a team of people who are fired up with enthusiasm for making homes more affordable than anyone else in your marketplace so that more people in your area can enjoy the benefits of home ownership. Remember to pay them well and treat them as though they are your most valuable resource, because they are.
Get everyone in your company working on developing a product that will deliver a lot of “WOW!” to the customer. Maybe you have fewer bells and whistles but excellent craftsmanship.
Build in a few special touches that cost less than the perceived value. For example, take an ordinary entry area from the garage and include a built in bench with open storage underneath so that kids (and grown ups) can dump book bags, sports gear, backpacks and such upon entering the house. Perhaps it’s just a simple wall closet in the kitchen turned into a really cool catch-all for the family. The cost of a few hooks, the lumber and paint will far outweigh the return of delight from your prospects, and the perceived feature value will be high.
Hire an outsider, like Lew and I, to come in on a limited basis and review your plans, walk your homes, your communities and brainstorm ideas that will make you the talk of the town and generate momentum and sales. Three days with Lew and I will generate enough ideas, activities and change to keep you busy for months.
If you want to be the low priced leader in your market, go for it. But don’t forget that with that strategy you must work hard and fight hard to remain there.
To learn more about Deborah Fisher and why she tugs on Superman’s cape, Click Here!
Copyright 2011, Fisher & Company, P.A., Deborah Fisher, DeborahFisherMarketing.com All rights protected.