Is Cheap The Best Way To Win Customers?

 

Most people  usually begin building their first businesses around the same time they’re becoming adults. Since the transition to adulthood is a time when most people aren’t earning high salaries — particularly if they’re entrepreneurs — product costs factor disproportionately into their buying habits. As a result, the value proposition they get onto early in their entrepreneurial careers is “cheapness.” They think selling something cheap is a key strategy for getting someone to buy. But is making something cheap really the best way to win customers?

I had an opportunity to meet with a seasoned businessman in Nairobi who shared his journey and view on the same, it all started with a cup of coffee.

He started  "Like plenty of entrepreneurs, I had to learn the answer to this question the hard way. Sure, more experienced entrepreneurs tried to tell me the answer, just like I’m trying to tell you here, but I wouldn’t listen. Instead, because I was developing my first companies during a time in my life when I needed to find the cheapest solution to my own problems, I believed others wouldn’t be willing to pay a lot for my products.

It took me two years of working on what ultimately became my first  company to finally understand why cheapness wasn’t a good value proposition. I was selling a computer software, and our price point was ksh 2,000 per user. I’d managed to work my way into pitching the head Sales at a 100+ person company, and he seemed legitimately interested. Then came the all-important question of cost.

“By the way,” he said after we’d gone well beyond the hour we’d scheduled for our meeting, “how much is this going to cost me?”

I hesitated. Pricing conversations weren’t yet easy for me. “For a company like yours,” I responded anxiously, “it’s going to be twenty thousand  per month.” He didn’t respond immediately, so I hastily added, “But we can do a discount if you purchase annually.”

The head of sales thought for another few moments, then said, “Twenty is a bit steep. I’ve got 50 sales reps who will need accounts, and I don’t think I could justify spending that much per person.”

If I had a time machine, that’s one of the (many) moments in life I would jump back to and stop myself from saying something stupid. What I should have said in that moment was: “That’s a lot lower than we normally charge; however, if you’re willing to sign a 24 month contract, I think we could make something work.”

But I didn’t say that. Instead, I looked at him stupidly and said, “What do you mean? It’s only ksh 2,000 per person.”

“Oh!” said the guy, with a strange look of disappointment on his face. “I thought you meant it was going to cost us ksh2,000 for the month. ksh2,000 per user for 50 users , ksh 100,000 right?”

“Yup,” I replied, believing the cheaper-than-expected price point was sure to close the deal. Instead, the deal began disintegrating. He started asking more questions about the product. He wanted a better understanding of how much analytics data we’d be able to provide. He wanted to know what our technical support and back end infrastructure looked like. He even wanted to know how long we’d been in business and how many customers we had. In other words, he went from being excited about how much potential our product had to being concerned our company wouldn’t even exist long enough to serve his business’s needs.

The meeting ended soon after without a firm commitment to buy. I tried following up, but he ghosted me. I’d lost the sale because my product was too cheap. In my potential customer’s mind, that cheapness translated to “not valuable.”

This is the fundamental problem with offering a “cheap” product. Purchasers associate the amount they pay for something with the value they’ll derive. It’s not necessarily rational, but it’s consistent. people respond this way because “[humans] are not only irrational, but predictably irrational” in relation to how they make price-based decisions. Pricing played an outsized role in determining people’s perceptions of value. We tend to assume expensive things deliver more value, and cheap things deliver less value.

 I lost by pricing my product too cheaply. As soon as he realized how cheap it was, the operational value my product could deliver was obfuscated by his preconceived notions about the kinds of products his company would purchase and why.

In his mind, big companies like his couldn’t get value from cheap products. Even worse, someone at his level in the company shouldn’t be making purchasing decisions about products as cheap as mine. Perception mattered to him more than results, and “cheap” is a difficult perception to break once it’s established.

The same is true for your business. Some people will make purchasing decisions based entirely on price. Heck, some people choose to buy products specifically because of how much they cost rather than how little they cost. However, for most people, price is only one factor.

This makes cheapness, alone, a poor value proposition to place at the center of your business. Instead, focus on delivering value. The more value you can deliver to potential customers, the less price becomes an issue." now go and look at your business and if price is the only value proposition you'll have to look deeper.

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