QUIZ: Lower the Price or Sell Value?
Scenario: You've got a product that that's massively better than the competition AND costs you massively less to manufacture. Do you lower the price to reflect your lower costs? Or do you raise the price over the competition to reflect your product's superiority? Please vote:
CLICK HERE FOR THE CORRECT ANSWER »
Scenario: You've got a product that that's massively better than the competition AND costs you massively less to manufacture. Do you lower the price to reflect your lower costs? Or do you raise the price over the competition to reflect your product's superior value to them? Please vote:
The correct answer is: #1: Undercut the competition's price!
Under normal circumstances, this would be foolish because it leaves money on the table. However, the sudden appearance of a product that is both massively superior quality and massively cheaper to manufacture always creates what's called a "market disruption." That's a fancy way of saying that the new product (yours!) is going to completely replace the old product (theirs!), usually quite quickly.
In this kind of situation, your competitors aren't the companies selling the old product, because they're dead meat no matter what happens. Your competitors are the companies that will soon be imitating your new product, and whose products will have similar functionality and the same (or even lower!) manufacturing costs.
Unless you're looking at making a short-term killing, your best move is to grow market share as quickly as possible so that you achieve a dominant market position. Ideally, you want to build a massive base of loyal customers, lock up the channels with your product, establish your product as a de-facto standard, and make your product the one that defines the category. To do that, you've got to lots of product quickly -- essentially clobbering the older companies out of the market.
The classic example is the IBM PC. When introduced, some IBM executives believed that the PC should be priced competitively against mainframes and minicomputers, even though it cost a fraction (dollars per computer power) to manufacture. Under that concept, a PC would have cost around $25,000.
Instead, IBM sold the PC at around a fifth of that price. The execs in charge of the PC group rightly understood the REAL competition wasn't the old style of computing, but the other companies (like Apple) that were entering the PC market. The low price of the IBM PC created massive growth of the product category, most of which IBM captured, allowing IBM to dominate the PC market for nearly a decade.
Truth to tell, though, "market disruptions" are relatively rare. Most of the time -- like when your product is marginally better or marginally cheaper to manufacture or both -- it makes far more sense to sell value and take in the extra margin. But if there's a massive positive delta between what you're selling and what else is available, you generally want to capture the segment before everyone else gets up to speed.
READERS: Anyone care to argue this point?