One of the worst things you can do in marketing is advertise price before value is proven. The most common type of price advertiser is the one that advertises a ridiculously low price never intending to honor that price. Or, they have one in stock at that price. In the worst cases, you could categorize these price advertisers in the “bait n’ switch” category. They bait the prospect with a low price to get in the door. Once the prospect is generated, they switch them to what they really want to sell. In the worst cases, the company would even refuse to offer the low price service. Do you have bait n’ switch operators in your industry?
The bait n’ switch advertiser is only one of three types of price advertisers. The second is what I call the “value choice.” The value choice, unlike the bait n’ switch is a legitimate business model, but has intentionally positioned itself as the lower price alternative. Think of how Southwest Airlines started.
They intentionally positioned themselves as the low price alternative and they were very focused about running their business model accordingly.
Not offering meals on their flights, their point-to-point routes, open seat- ing, and the revolutionary “10 minute turn around” have all kept their costs low so they can offer a lower price and make a healthy profit. This model doesn’t work for the small business that doesn’t have the scope or infrastructure that a large company has.
This brings me to the third type of price advertiser. The third type of price advertiser is the small business that doesn’t have the management infrastructure, the reach, and cannot handle the volume that a larger company can. Let’s think about a plumbing company. If a plumber is a smaller operator, why would he want to match the price of a bigger operation?
He can’t compete with their margins. He doesn’t have the management infrastructure, the capital, the brand image, and the television commercials that the larger company has. His revenue is generated by his sweat. Therefore, even though the overhead is lower, this person should charge more, rather than less. The key is that this plumber must understand what differentiates him from the larger firm, which we will get to in a moment.
But, let’s look at a comparison between the smaller operator and the larger company. Let’s say this is the income statement of the larger firm:
– $2.5M Cost of Sale
=$2.5 M Gross Profit
– $2.0M Fixed Expense (40%) =$500k Net Income
If a smaller operator who billed $200,000 has the same cost structure that produces a 10 percent margin, he would end up with $20,000 in profit. Not cool! And that’s what is happening in small businesses around the world every day! Obviously there are lots of variables in this scenario, but the point is that you can’t compete with the larger company on price.
Instead, the smaller operator should charge higher prices and leverage the benefits that a smaller operator can offer. So the saddest case of all the price advertisers are the small, independent business owners who just copy the big company instead of understanding how to position themselves differently.
The bottom line is that price advertising attracts price shoppers. So don’t do that!