August 06, 2015

Prices Go Up, Prices Go Down

Virtually every item in the image is on sale. 35% off. 40% off. 50% off!

When a business is climbing the ladder, the business often sells something new, innovative, clever. New designs. Something you cannot readily get elsewhere. This allows the brand to charge a premium. The brand charges $79 at a $29 cost of goods. That's $50 of gross margin, folks. And customers happily pay, because they are getting something that cannot readily be purchased elsewhere.

Then ... in two weeks or two months or two years, the competition comes after you. Hard. They knock off your item and sell it for $49 (at a $24 cost of goods ... #competition). Now the battle is on ... you're likely to match prices, and that costs you profit.

Eventually, everybody is selling the same thing, and one or two companies win the low-price battle. Now you've got problems. If you lower prices, you just set off a constant cycle of deflation that you cannot win ... the competition will always be able to offer something at a cheaper price and a lower cost of goods sold. This is where gamification comes into play. Rewards points. 35% to 50% off select (or all) items. Free shipping. 20% off plus free shipping. This always works. And this always destroys the business. In the short-term, the gamification crowd is attracted. In the long-term, all you have left is the gamification crowd, trapping you in the perils of gamification.

Maybe this is the way it has always been. In most of my projects over the past two years, I'm dealing with companies charging $79 at a $29 cost of goods sold ... or I'm dealing with companies selling the $79 item at 40% off. The audiences attracted to each proposition are fundamentally different. Unfortunately, we tend to call each audience "the customer". This is a mistake.

Once we're stuck in the $79 item at 40% off, we might want to consider a new line of business ... a new brand ... building a future audience not pre-destined to purchase at 40% off.

Prices go up in the early days of brand health. Prices go down as the health of the brand deteriorates.