How A Low Price Can Actually Kill Your Sales

A small business seminar that I was speaking at ended last Saturday around 2:00pm, so I decided to stop into a nearby electronics store on the way home. I wanted to pick up a video recording system (camera, tripod, microphone, etc.) for a client of mine, plus look at a couple of items for myself.

My five-minute experience in the “video camera” section provided the material for a quick-but-important lesson in pricing strategy that all small business owners, entrepreneurs and sales professionals should pay attention to…

The sales clerk that pounced on me as soon as I entered the area seemed surprised – but very happy – by how easy a customer I was.

First, I went right to the most-expensive brand and model of pocket video camera – the one I currently own and use myself, and buy/recommend for all of my clients and students. Then, I quickly chose a tripod from among the few choices. Finally, I asked the clerk to point me to the microphones, from which I again quickly made my choice. He happily gathered up my three boxes and started leading me to the checkout area.

That’s when today’s lesson occurred.

On the way out of the “video camera” section, after I had already made my buying decisions, I saw hanging on the shelf a shockingly cheap video camera. “Wait. 25 bucks for a video camera? What’s this one all about?” I asked the clerk, moving towards the item.

But I quickly answered my own question, as I casually checked out the camera through its “blister pack” packaging. “This one can’t really be any good, if it’s priced so low” was my quick conclusion (“blister pack” packaging itself screams “this is a cheap product”), and I directed the clerk to continue leading us up to the checkout area, where I happily paid more than seven times as much for the video camera I had chosen.

Along the way, I gave him a quick lesson on pricing strategy mistakes (not that he cared) – the same one I’m teaching here:

The biggest myth is that people buy by price.

All the research data tells us that fewer than 25% of consumers (various studies have it as low as 10%, some as high as 18%) list “price” among their top 5 determining factors in their purchases.

(*By the way: In business-to-business, where a lot of people insist “everybody buys by price” it’s actually fewer than 15%. And these are professional purchasing agents, which everybody thinks “they’re only buying by price.” But of course they’re not only buying by price, because their jobs are on the line with every purchasing decision that could go wrong.)

More than half of consumers who list “price” among their Top 5 Determining Factors do so out of unavoidable necessity (such as single mothers with three kids and a minimum-wage job), and it makes little business sense to choose to market to this least-profitable segment of the population.

So once we remove these people from the equation, we are left with only about 10% of people who make their decisions by price. Yet almost every small business owner, entrepreneur and sales professional thinks and behaves as if everybody makes their decisions by price. That is a tragic mistake, because not only does pricing our goods and services too low eat away at our profits, but it effects the very perception of the quality of our offerings.

If it were true that people buy by price, then everyone would be driving a Hyundai, the only store in any town would be a WalMart, the only restaurant a McDonald’s, the only hotel a Motel 6, etc. That isn’t the case anywhere in the Chicagoland area –or anywhere in America – so it isn’t possible that “people buy only on price.”

More importantly, we must realize that, as in my video camera shopping experience, the price of an item or service has a profound psychological effect on our perception of the quality and value of that item or service, and mistakenly pricing our goods and services too low can kill sales.

Here are a few illustrations of this principle in action…

If somehow you were wrongly arrested and charged with a major crime, and a “rich uncle” appeared and told you he would hire and pay for whatever defense attorney you chose, would you rather be defended by a $5,000 an hour attorney or a $200 an hour one?

Simple question, right?

Yes, as long as I don’t tell you that the $5,000/hour attorney is a client of mine who is fresh out of law school but understands the psychology behind pricing strategy and how to properly market himself, and the $200/hour one is an accomplished, experienced lawyer who knows all the judges, prosecutors and procedures, but hasn’t the foggiest clue about how to properly price his services.

Or have you ever heard anyone brag about how much they paid for something, such as “This is a $3,000 suit” or “These earrings cost $10,000 for the pair” or “Yes, our landscaping had better look good – we paid $50,000 for it”? This happens all the time, and in these cases, a lower price would actually lose the sale for the seller.

For similar reasons, there was no way I was going to purchase a “cheap” $25 video camera – not for my own use, and certainly not as a gift for one of my clients.

The electronics store sales clerk laughed when I told him that somewhere, some corporate “marketing expert” is completely befuddled that “we created an excellent video camera, packaged it so that everyone could plainly see all its features and gave it the lowest price in the market – so how come no one’s buying it?”

If they take that very same camera, and without making a single change to it other than to re-package it in a slick box and increase its price about 5 or 6 times, then the next time I’m shopping for one I just might buy it. At least I’ll strongly consider it, instead of instantly dismissing it.

And if they get a celebrity to endorse it, it’ll likely fly off the shelves!

That’s the power of a proper marketing and pricing strategy.

How about you? Are your prospects laughing at your fear-based pricing strategy? Or are you making the right decisions in this all-important area?