Low Price Or High Value – Which Way Works Best For Success
In this article, I would like to share with you a case study on what I observed a few years ago in the electrical retail sector regarding low price vs high value. This was something that I was interested in knowing and I was in the right place at the right time to observe it in action.
I was told a long time ago that there are 2 main principals in getting a business to succeed sales wise.
- The first is to offer low prices and try to get a high quantity of sales, this was called volume selling.
- The second was to create an experience for the customer, not cut your prices but offer more value so the customer could see why your product or service was worth the extra. This was called value selling.
Below is a case study that I saw in action when I was living in a large rural town. All of this was observed over a 12 month period and was very interesting to say the least. This really shows the difference in the Low Price Vs High Value debate. Hope you enjoy this case study. Please feel free to leave a comment below on whether you have experienced similar outcomes in your own business.
The Low Price Strategy
A few years ago I knew the owner of a medium sized electrical franchise in a large rural city, for the sake of anonymity we will call him Fred. It seemed that almost every weekend his store had a sale on. We had quite a few discussions on why he felt the need to do this and how it was working out for him.
Apparently the main reason for the constant sales was to compete with the much larger electrical outlet in town. They also had constant sales and were hell bent on eliminating any and all competition in the area by undercutting and offering lower prices which they were able to maintain due to their larger buying power.
Most Of His Competitors Were Doing It Too
Indeed, of the 5 main electrical goods retailers in the town, 4 of them including the larger one had sales on quite often. This was all to compete in the market and try to make up for the lower profit margins with a higher volume of sales.
Over the space of 12 months, I watched Fred become more and more stressed as he constantly fought to compete in the market and still make enough profit to survive. Over this period Fred’s store had a grand total of 33 “sales”, some lasting 2 weeks and others one or two days.
When I asked Fred how things were going, he sighed in resignation and said he would end up having to close down the store as he just couldn’t compete price wise and was slowly but surely killing his business with a constant loss even though he was getting a reasonable amount of customers.
Going into details, Fred explained that when they had a sale on they would get quite a lot of people coming into the store browsing for a bargain. However this did not convert into enough sales to make the sales worthwhile as a lot of the browsers would then go to the other electrical stores and get them to beat the sale prices.
Sales Do Not Necessarily Create Sales
In such a competitive market, Fred had found that while offering lot’s of sales brought people into his store they did not necessarily by from him, which meant he was running at a loss because he still needed to have more sales staff to help the volume of visitors to his store but was not making enough sales to cover the costs.
“People are also now expecting sales” Fred said. “When we don’t have a sale on, the amount of people who come into our store drops significantly, and even those who do come in are looking for a bargain price match for something they have seen at another retailer so if I don’t match it they just go elsewhere”.
Fred’s electrical store has since shut down because as Fred had decided to try to compete with constant undercutting and sales he found it impossible to still have a viable business.
Discounting Is Not The Answer To Poor Sales
This is something I see often in my own industry and many other service and retail businesses. The general mindset seems to be that having constant sales will attract more customers and therefore create more turnover for the business. Business owners think that the only way to compete is by offering lower prices and having sales to bring the customers in. What they are really doing is making it harder for themselves to have a sustainable business and having to work harder to bring in a profit.
The High Value Option
Now, some of you may have noticed that there were 5 electrical businesses in the city, but above I said only 4 of them had the constant sales and price reductions. So what about the fifth one?
The fifth electrical store was a family owned business that had been there before any of the competition started up in the city. It only had 2 sales a year and would never price match with the other businesses, indeed when push came to shove they always stood fast and would rather see a customer walk out the door than compete on price.
What they did do that kept them in business was they offered a great service, had an excellent return policy and were able to offer advice on what you needed in an expert manner. While the other stores stocked a large range of different products that did the same thing, the family run business only stocked premium products that were higher quality and had a much better reputation and guarantee.
Rather than having a high number of visitors through their store, they were known as the place to go when you wanted something that would work well and last longer than anything the competition stocked. They offered a great buying experience that was hassle free and pleasurable. It was not unusual for customers to just come in for a chat and end up buying something whilst in the store.
Value Equals Loyalty
It was also the only electrical store that still shut on Saturday afternoon and all day Sunday, and people would actually wait until Monday to come in and get what they needed. It had a very loyal following of astute customers who appreciated both the quality of the products and the experience of buying at the store.
Because they didn’t have constant sales on or reduce their prices to compete, they had a higher profit margin than the other stores which meant they didn’t need to sell volume to be successful. Instead they concentrated on offering a shopping experience that was above the other stores, which created a higher value perception with their customers. This that overcame the higher prices for their products.
This can be done in whatever business you are running, be it a physical store selling products, a service based business, a tradesman type business or even an on-line venture.
It’s Your Choice
You have the choice on whether your business will compete in the market on price or on the customer experience. If you go down the price pathway, you need to have a high amount of new customers and make lots of sales to be sustainable. However if you go for customer experience you will need less sales, be able to provide better service and become known for your value.
Now, how about you? Which way does your business operate? Have you worked out which option (low price vs high value) is better for your business? Please let us know in the comments below. We would love to hear what your experiences have been.