Last night I heard Bill Rus of Venture Analytics speak to a group of product managers (SVPMA) about using research to get a product right before going to market. Part of the “getting it right” that he discussed is pricing. So I was pleased when he offered an answer to a question that has been on my mind: Can small businesses make it on low price?
Of course, small businesses can have lower overhead given the right circumstances, and generally smaller businesses tend to operate more efficiently than the giant companies that often become staff-heavy. But giant companies have a buying advantage because of the volume of business they do, so if cost of goods is a big component of your financial statement, chances are the “bigger guy” can win on price since they pay less per unit. And we’ve all heard of “making it up in volume”.
But Rus made another point on the subject. He talked about the “portfolio factor”. How much of your product line will a product represent in your portfolio? If a product represents 70% of your sales compared to a competitor for which the product is just 3% of the portfolio, pricing that product low is going to hurt you more than the other business. They can make it up on the other 97% of the product line. Can you make it up on 30% of yours?
Reinforcing the idea is a blog post from Reuben Swartz of Dollars and Sense: The Pricing Blog. Swartz talks about how Wal-Mart’s lowering the price of Panasonic 42-inch flat screen TVs below $1,000 has hurt Best Buy, Circuit City and others. Flat screen TVs are a small item in Wal-Mart’s product portfolio, but they’re a much larger part of the portfolios of the consumer electronics retailers.
So consider the portfolio factor when you set your pricing. If you’re a one-product business, a larger competitor can undercut you successfully. Better to sell on value, not on price. Offer added value to your customers through better service, perhaps, and charge what the extra service is worth. Just make sure you deliver on the promise.