When is price a strategy? Almost never.
If price is your primary selling point, you should reassess if you really have a value proposition.
I occasionally guest lecture at the University of Washington (UW) Business School. The UW is where I got my MBA so I have an allegiance there. More importantly, I find engaging with students is one of the best ways to stay current on business and employment trends. I recommend it to everyone.
I was recently invited to present to a class at the UW Buerk Center of Entrepreneurship. They asked me to talk about the application of sales planning and building a sales culture in start-ups and small business in general. I presented The Five Abilities™, which was met with a good reception. When I talked about VIABILITY, I made the comment that price is never a strategy (a common axiom in sales) and that it’s never good to plan on losing money as a means to get a foothold in the market. When I finished and moved to Q&A hands went up.
A student didn’t wait for me to call on anyone but just asked, “You said it’s never good to plan on losing money. How do you explain Amazon?” I recalled the game of ‘stump the lecturer’ when I was a student. Now it was my turn. Adding to the zeal of the students, the head of the department was at the lecture, so the game was on.
The student got a positive nod from the department head, who then turned her attention to me with a look that said, “How well do you dance?” It actually was a very good question because it allowed me to elaborate on the difference between a strategy of investing in brand and VISABILITY to establish your market position, versus losing money on each transaction by using price as a means to create VIABILITY for the customer.
Jeff Bezos started the online retail giant in 1996. Amazon had immediate sales success, but was still losing money. In 1998, he told PC Week, “To be profitable now would be a bad decision. This is a critical formative time if you believe in investing in the future.”
It’s important to remember that Bezos was a successful investment banker before he started Amazon, so he had some savings. He also started Amazon in the midst of the dotcom boom, which allowed him to go public about a year after founding the company. Therefore, he had the capital to invest and his plan, from the start, showed no profits for at least five years. The important distinction is that he wasn’t losing money on each sale of a book, but instead was plowing the profits back into the business to build the brand and the infrastructure leading to an overall loss on the income statement.
(Note: ATT Wireless, then McCaw Communications, had a similar model where they had to establish their brand and build towers around the country, so people could make mobile calls in places other than Seattle.)
The mistake some entrepreneurs make is equating loss on the income statement and loss on each transaction, as the same strategy. I’ve heard from a few start-up founders that they need volume to establish their brand so deep discounting early in their existence, is appropriate. The problem is that raising price is next to impossible, especially in this era of declining cost of goods, so if deep discounting is the only way you can earn VIABILITY with your customers, I suggest you reassess whether or not you have a true value proposition. This also applies to products late in their life cycle.
Building and/or updating your Ideal Client Profile (ICP) and your 30-3-30 are good tools that The Five Abilities™ sales methodology offers to help you determine what your true value proposition is and, in my experience, low price is rarely the answer.
I’m anxious to hear your thoughts and experiences at rick.wong@thefiveabilties.com. Thanks for reading.