When it comes to quality and value, you get what you pay for. But when your company uses low pricing as a positioning strategy and competing on the lowest price, you run the risk of training buyers to expect a quality product at a price less than it’s worth. By embracing a lowest price mentality, you’re encouraging buyers to equate “value” with “cheap.”
When taking the lowest price path, there are a few potholes to avoid ensuring a smooth journey.
What you find with the government, for instance, is that buyers tend to focus on getting the lowest bid, which isn’t necessarily in their best interest. In the consumer space, Wal-Mart’s lowest pricing strategy drives the idea that people should expect quality at really low prices.
This approach might seem like it’s a good deal for buyers, and who doesn’t like getting a great deal, but it can end up undermining the customer experience and your business. For instance, to maintain your position at the lowest price, you have to maintain a constant focus on continually cutting costs. As you continue cutting costs, eventually they become corners, your quality tends to go down, and your customer satisfaction with it.
For consumers, deep discounting and low prices encourages consumption: The products are cheap, so they feel more comfortable making purchases. In the US, with almost 70 percent of GDP from consumer spending, there is a lot of encouragement happening. But the poor quality soon results in poor customer experience, in the form of short product life (they break or wear out quickly), and with cheap, discounted products filling up landfills.
A low pricing strategy has a similar affect in B2B and B2G contexts: A business buys a machine or material because it’s the lowest price, only to have high failure rates in the field. The business doesn’t get good value from the product and now has the added burden of dealing with the impact of the poor customer experience.
Constant lowest pricing also trains buyers to hold out for a lower price, and undermines brand loyalty when there is little differentiation between competitive products. Just ask the tech industry, where buyers often hold off from buying a product because they know the cheap product they purchase now will soon be both overpriced and obsolete or buy from the lowest priced brand at the time. Taken to extremes, a lowest price mentality may lead to decisions that push the boundaries of ethics, such as moving production to parts of the world where child labor and poor working conditions enable low production costs.
But is there ever an upside to encouraging “cheap”?
In certain situations, yes. Including a cheaper option in your product portfolio might be useful in your larger pricing strategy. A sales rep could show the buyer your cheapest model, explaining what it does and doesn’t offer, and then show how it compares to a product that’s a step up. Used in this way, offering a cheap product gives customers context that helps them determine value and choose the product that best meets their requirements.
On the whole, however, a lowest price mentality can distort the true relationship between price and quality by training buyers — and possibly also your own company — to expect a lot of quality for the lowest possible price. Maintaining a disciplined pricing strategy with just one of the approaches will help keep the price/quality equation in balance and continues to train your buyers to expect to get what they pay for, which ultimately delivers a better customer experience and better outcomes for your company.