Rich Entrepreneurs Get Richer, And …
I have a theory. It’s just a hypothesis. I could be totally wrong.
But, since the hypothesis is at least based on some actual observations, I could also be totally right.
Whether my theory is right or wrong, you can still take away an important bit of knowledge to help your startup.
Here goes. See what you think.
Over a number of years, I’ve noticed that some people are more prone than others to pitch ventures with a price-competition value proposition. This is nothing new, but I bring it up today because I just saw it in action at a couple of pitch competitions. And I think I may now better understand why it comes about so often.
We’ve priced our product noticeably less than competitors because we want everyone to able to afford it. It’s only fair.
Anyone who works with entrepreneurs or listens to pitches has heard this so many times that you have probably just laughed it off as a common rookie mistake. Educate them in the ways of profit margin, and they’ll come around immediately to more correct thinking, right?
When you suggest to some founders that they are leaving money on the table or putting their profitability at risk, the founder gives you that “You just don’t get it, do you?” look and says something like, “Well, we’ve actually thought it over, and we have a really good reason for pricing that way. It’s our advantage. People will flock to us. In fact, if we price our product higher, people simply won’t be able to afford it.”
For them, a low price compared to competitors is a given — end of discussion. Profit margin and ability to sustain your business? No need to discuss. The fact that competitors’ higher pricing proves that higher prices are just fine? No thanks, don’t need to consider that. The fact that their startup has zero economies of scale to support lower pricing? Not important. Demand elasticity and market segmentation? No need to get all fancy, now — this is a simple business.
Why? Let’s dig a little deeper.
I’ve noticed that the three groups I am most likely to hear this from are:
- Young founders who are high school or college age, often still in school.
- First time founders who are employed but are living paycheck to paycheck.
- Founders who perceive they need to always be constant bargain hunters.
What do they have in common? None of these groups has much disposable income of their own or at least perceives that they do. Here’s my hypothesis.
Founders who have [or perceive they have] little money of their own are more likely to see low price as a necessity for sales.
I believe that this is, at least in part, a cognitive bias problem.
A student with a low wage part time job (or none at all), someone who worries if their paycheck will stretch from week to week, or someone who is conditioned to be a perpetual bargain hunter will see the world through an entirely different lens than someone more affluent. When they found a venture, price seems like a hard-stop limiting factor. They are personally always looking to save here and there, and a low comparative price is what they look for — each and every day. Since their total disposable income is quite limited [or at least perceived to be], any higher ticket price is bad news — and a lower comparative price is a blessing. Even if a product is well worth a higher price tag, paying that would mean that they have to forego something else that they may need or want.
You who are more studied in cognitive decision making than I am can fill in the details (hopefully in the comments), but I see this as a framework bias problem. In their framework, it is logical to stand out by being noticeably underpriced. Worse yet, in their framework, higher price points are something one simply ignores as being ludicrously not affordable.
Four Ways to Escape the Bias
- Get feedback outside your small circle of friends.
A good coach or mentor will ask the founder to go talk with potential customers in the target market and test higher prices (and assume that the founder will quickly find support for a higher price). But wait. Many founders will likely start with people they know — in their own circle of friends. Most likely, they will be talking to people in the same or similar economic circumstances — who will reinforce that price-competition theme. So, the founder who wants to break away needs to be very purposeful about what feedback they pursue and listen to.
One tactic could be joining a meetup, a mastermind group, a networking group, or some other social group where the socio-economic mix is different — just to hear a wider mix of opinions and ideas as you talk about your business. By the way, this is exactly where the devils of privilege and lack of inclusivity tend to crop up, so the founder may have to work extra hard or extra bold at it — but that is a story for another time.
Another tactic could be prospecting online without regard to socio-economic traits. By allowing anyone to jump into the top of your sales funnel, you widen the population of people from whom you can solicit or otherwise receive feedback.
2. Give your competitors some credit
That well known competitor you think is so silly for pricing products too high is — by definition — making sales at that price! What more proof do you need that your target market can afford those prices?
If you start from that premise, you can spend a little time researching how those competitors identify and approach their market. Find out where they place ads or have distribution and learn how they reach their market. Read, watch, and listen to their marketing message and learn how they characterize their market. And then figure out how you can also reach them.
3. Purposefully make your brand stand for something other than low price
Have your ever bought coffee at Starbucks? Lush cosmetics? Nike shoes or apparel? Or any luxury or upscale brand? It wasn’t low price that drew you there. It might not even have been the specific product features. Your brand communicates your values and how customers will feel when they interact with your product and business. Your brand says what you stand for — and that doesn’t have to relate to price!
What brands do you admire? Why? What do you value — that you believe others will also value? Why? What do you want people to think when they hear your business’ name? In what ways can you construct and communicate an identify that portrays this message — in a way that rubs off onto your products?
If you actively turn your thoughts to competitive dimensions other than price, you unlock your ability to discover other reasons why your customers buy — other attributes that they value more than price. In the long run, this may affect how you design your product or your customer-facing systems (not just your marketing message and methods).
4. Repeat after me, “Not everyone has to buy my product”
For the same reason that some first time founders expect buyers to love their product just because they love it, they sometimes also expect buyers to want the same price point they want or can afford. But, markets have multiple segments — and not every segment thinks the same in relation to price point and value. You don’t need to capture or target the entire market in order to become successful.
It is quite all right for you to sell to a less price sensitive market segment [at a higher price point]. If you don’t believe that, do more competitive research and you’ll see that those “overpriced” competitors are likely doing exactly that.
Could you also sell a lower price point product to the more price sensitive segment? Maybe — but remember that means creating a differentiated product for that segment that allows you to make a decent margin, while you also sell that higher price point product to the less price-sensitive segment. It doesn’t mean just lowering price and margin to accommodate the price sensitive buyers.
You are not your customer
We all have cognitive biases. We all have decision heuristics we use consciously or unconsciously when we buy. Break free of your own and address the market that will pay you well for the value that your product provides.