Cheap Doesn’t Have To Mean Great Value (Or Lower Margins)
Low-priced products are a great way to attract price-sensitive customer but the thought isn't always appealing...
“Oh, great, a small sale with even lower margins. Why even bother?"
A low price does not have to mean lower margin. The price sensitive customer is usually focussed on price, not value. You don’t have to sacrifice margin and give them a great deal at a low price, you just have to give them a low price.
The cheapest is not always the least expensive. You could buy a $200 delivery van but would you? No - because the cost of missed deliveries, service, etc. would outweigh the savings. There is no guarantee that the least expensive is the best value.
A shop that was exceptionally busy at Valentine's Day used two people just to work the door. Partly for safety (to control the number of people in the store), partly for security (to make sure nobody took product without paying) and also for service – helping customers that were just picking up, and helping other customers find what they were looking for.
The also noticed something – a lot of people were leaving without buying anything. When asked “can we help you find something?” the answer was almost always “a single rose”.
Single rose is code for what? Cheap, right? Not always, but often. Sometimes, for teenagers, a full dozen was just too big a statement. Regardless of the reason a lot of sales were being missed.
It came up at the follow-up staff meeting the next day. The manager did not want to get into singles. They were worried that it would cannibalize sales of (more profitable) dozens, and that what little profit could be made wasn’t worth the effort.
But who said the store needed to follow the same cost-plus formula? The following year the cheapest dozen was probably $24.99. The singles, which were a slightly nicer roses, didn’t sell for one-twelfth of that, they sold for something like $8.99.
The store also also used a hurdle. Te singles weren’t put on display. They weren’t even offered until the people working the door saw walking out of the store empty-handed. At that point they would engage them and, if they said they wanted a single, they'd explain there were one or two hidden away in the basement. This hurdle assured that only those who were really serious about singles, and would not be tempted by a full dozen. would buy them.
The approach was so successful it was tweaked and offered again the next year. An even better, a nicer presentation, and a price of $12.99. The year after that was up to $29.00 for a dozen and $14.99 for a single. At that point they were so profitable the store didn’t bother hiding them, they were thrilled to sell as many as they could.
It all gets back to the idea that the low price does not have to equal lower margin. And, again, if the store had been slaves to a cost-plus formula they never would have had all that extra profit.