TapRun Consulting

The Pricing Newsletter

February 2018 issue

Hey there,

I have a question for you: Are we in the middle of a financial bubble?

When it comes to figuring out what goods and services are worth, most people just go with their gut, and the results are often disastrous.

Remember the Beanie Babies craze from the 1990s? Here's an inside look at one investor's thought processes during that particular mania.

The inevitability of the Beanie Babies crash is obvious now, but it wasn't so clear at the time. The reason why should be obvious: Nobody thought about pricing.

Pricing question from a reader

Today's question comes from reader R. N.

My company manufactures and sells industrial molds. Although we're a new company, we are skilled at what we do and produce very good products. Unfortunately, businesses keep buying our competitors' products that are of lower quality and don't last as long as ours. We're only charging a bit more than them, but given the extreme difference in quality, I don't feel like that should be causing a problem. What is wrong with the buyers, and why aren't they choosing us instead of our competitors?

I know what you want me to say - you think that the problem is that the buyers are being short-sighted. They could save money in the long run by buying from you instead of your competitors.

This may be the case. Maybe you just need to adjust your messaging to make your value proposition clear. Do customers realize that your products last longer than those produced by your competitors, or are you just assuming that they will figure it out?

For the sake of argument, let's assume that purchasing agents have perfect information with respect to your products' longevity.

Why would they spend money on your competitors' inferior products?

Without more information, I can't say for certain. That said, here are a few questions that you should be asking yourself:

Are you discoverable by your ideal buyers? It may be that buyers would be thrilled to pay more for your wares, if only they knew you existed. I'm currently drafting a list of discoverability methods that might prove helpful. It's still in a rough state, but you might find some value there.

While your products last longer, are they otherwise similar to those made by your competition? I'm no expert in molds, but the benefits of a longer lifespan might be offset by a more time-consuming setup process, additional complexity in use, or difficulty in cleaning. For molds that are not often used, the space and conditions required for storage might also be areas that detract from the value of increased longevity.

Are your purchasing terms the same? It might be that your competitors offer more favorable payment terms, guarantees, lead times, or order minimums. Any one of these could prove more important to buyers than longevity.

Is your reputation and trustworthiness on par with the competition's? Buyers will often pay a premium for a known brand with a long history of success (even if its products are objectively inferior to those of a competitor). Also, some corporations may not be able to buy from you until you've been vetted and added to an approved vendor list.

The real question you need to focus on, however, is whether your improvements are desirable at all. There are many needs for which only a minimum level of quality is required. As an example, I recently bought a paper notepad to record some of my brainstorming. I purchased the cheapest paper I could find. Sure, I could have spent more for artisanal museum-grade cotton rag paper, but I just wanted something for sketching out some diagrams. Yes, my low-quality paper will yellow in the sun and turn to dust long before future generations can marvel at my genius, but the truth of the matter is that I just don't care.

The entire pad of paper will likely find its way into a recycling bin within a month, because anything I write down will be digitized into my computer within a few days. I'd receive zero benefit from paper that lasted any longer. It may be that buyers in your marketplace are in a similar position. Maybe they just don't care about longevity (either due to short production runs or an unspecified perverse incentive).

In any case, don't fall into the trap that customers will automatically purchase a more expensive option just because it's better. Sometimes good enough is simply good enough, and shoppers will receive no advantage when purchasing a more expensive option.

Questions come from readers like you. If you'd like your questions answered, send them my way.

Pricing in the news

Pricing article from the blog

Notable pricing quote

"It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." -- Warren Buffett

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