It’s very understandable that a business owner might drop prices in the face of declining sales. After all, lowering prices is a widely-used tactic by national and regional brands. However, in many cases it is just that – a tactic – not a strategy. A tactic is an action you take to drive a particular short-term result; a strategy is a long-term plan to create value. More on that next month…

If your approach to winning customers is to offer the lowest prices, you might want to rethink it. A competitive advantage based on price alone is almost impossible to sustain. Very few companies successfully pull it off. Walmart is an anomaly.

Competing on price is widely regarded as challenging for small and mid-sized businesses. From a sales perspective, being the “low-cost provider” of a product or service is easy for a competitor to replicate, which puts more pressure on you to drop prices further. Every time you drop your prices, your total sales volume (in terms of dollars) decreases. If your cost structure isn’t low enough to support the low prices you offer, your margins get squeezed and less money ends up in your pocket. You may have heard the saying, “We’re losing money on every one, but we’ll make it up in volume.” Not a good place to be, and definitely not a practice that will bring you business success in the long run.

However, there is another less obvious reason why offering the lowest prices can be problematic: If you are competing on price, you are leaving money on the table. You are probably asking for less money than your customer is willing to pay.

The value a customer perceives in a purchase is not dependent on price alone, but is primarily a function of how well the purchase met a set of needs. Often, those needs are emotional and therefore not obvious without some deeper consideration. The emotional needs can be the most interesting, and the most actionable.

Consider hiring a plumber. It may seem like a service that affords little opportunity for differentiation. Yet, I can personally vouch for the fact that it’s not just what a plumber does, but how he or she does it, which matters. One day when my son was only two months old, I was home alone with him. I heard a gurgling noise and, upon investigation, I was appalled to find that raw sewage was backing up through the shower drain in our first floor bathroom. My obvious need was to clear whatever was blocking the sewage line, but I had emotional needs as well:

• I was home alone and my husband was two hours away, so I needed an extra set of hands to enable me to care for my two month-old baby while also dealing with the sewage problem.
• I was a new mother, so I needed to feel like I was creating a safe and clean environment for my newborn son.
• I was sleep-deprived from being up all night with an infant, so I just needed someone to help me feel less overwhelmed.

Two hours later, I didn’t even think twice when I wrote a $350 check to the plumber, even though it was a completely unanticipated expense. I was relieved that the plumber responded immediately and eliminated the health hazard. I was appreciative that he was reassuring and calm. I was grateful that he took charge of the problem, freeing me to care for my son. I was glad that he was conscientious about keeping our house clean while he worked. Of course, I needed the service that he provided, but I also found a lot of value in how that service was delivered.

It’s the same for your customers. Perhaps they need to save money or they need something on short notice. Maybe they want something highly customized and are willing to pay for it. Or they need someone to solve a problem without requiring them to think twice about it. This applies when selling to businesses as well. On one hand, the person in the business to whom you are selling has emotional needs, such as a desire for a promotion. On the other hand, the business itself has needs, for example, needing an investment into a new market segment to bear fruit. Imagine how it would benefit your business to understand these needs and find a way to meet them.

If you haven’t done so, take the time to consider the layers of needs your customers have around the product or service you provide – and the way in which you provide it. The energy you spend thinking about your customers’ needs will enable you to make other decisions, such as how to set prices, a lot more easily.

Do that and you will be well on your way to growing your revenue without leaving money on the table.

UPDATE: The day after I posted this article, I met John Majeski, who owns SERVPRO of Eatontown/Long Branch. His company specializes in cleaning up after water or fire damage, and the business’ tagline is: “Like it never happened.” What a great example of positioning business based on the how you meet a customer’s emotional need.