Imagine, just for a moment, that I had just parked two brand-new cars in your driveway.
I walk up to you holding out two sets of keys, one to the new Mercedes-Benz automobile on the left; the other, a brand spanking new, Honda accord on the right. Which car is the superior car? If I offer to give you one of them, which one will you choose?
Almost without exception, everyone answers, “The Mercedes!”
Forgetting the question of German engineering versus Japanese engineering, for just a moment, stop to ponder why we all respond the same way.
The confident, secure, intellectually steadfast among us will launch into an explanation of why we chose the superior German automobile.
The facts, however, are simple. Most of us are not engineers. Most of us are not expert judges of the mechanical suitability of automobiles. We use shortcuts to make such decisions. One such shortcut is price.
Let me present a different scenario to you. Let’s suppose that I pull up in your driveway in a brand-new Mercedes-Benz. I park, hop out, walk up to you and hand you the keys. I say, “This car is yours for only $5,000 cash, right now.”
What is your response?
If you’re like most of us, your response is, “What’s wrong with it? Is it stolen?”
You instinctively know the price is too low. Either there’s something mechanically wrong with the car, or it is stolen.
The tipoff is the price.
It’s no different in business; if you respond to marketplace pressures by lowering your prices, customers make a series of assumptions. They assume that you have somehow also lowered the value of your offering. Or, worse, they assume that the offering was never worth the original price you quoted to begin with.
Many studies have indicated it’s possible to increase sales, simply by increasing price. The explanation is simple: people assume that a higher price means higher quality.
In order to put this principle into practice, you must of course supply value for the dollar. In other words, after the transaction is complete and the customer has had the opportunity to experience or use your product, they must feel as though the benefits of the product outweighed the expense of the purchase.
This is actually easier to achieve than most of us believe.
Once you have accomplished building a product offering that is worth what you’re asking for it, and once you have set a price that indicates that your offer is a valuable one, you can be confident that your business is built on a solid foundation.
So the response that is appropriate in economic times like these – times when there is more pressure on businesses to provide value – is simple: provide more value, at a higher price.
In any economic circumstance, cutting your prices can be equal to cutting your throat.