Price isn't simply a number. It's a feeling.

Many business owners continue to underprice their product or service because they're confusing customer acquisition with business growth. Now, these are in no way the same thing, yet we treat them as if they were when we're setting pricing. The idea is that we enter a market with a hopefully decent, decent enough product, but we price our widget considerably cheaper, or at least noticeably cheaper, than the average going rate for the category. Okay, the plan is that our lower pricing will fast-track us into buying market share from the established category leaders. The idea is we'll build sales volume first and then we'll optimize our profit margins later. And you see this kind of thing with a lot with startups especially who are trying to break into competitive categories, and they feel that this is the only realistic strategy they have to grow pipeline and users in a, in a shorter space of time as they can, so that they can get their next seed round or exit with a squillion in the bank and spend the rest of their days as an angel investor or whatever else these people get up to. But the thing is, where all of this thinking starts to go wrong is based on the assumption that pricing can be turned up or down however we like, like the volume control on the hi-fi or the thermostat on the air conditioner. But pricing is much more than that. It's a category signal and one of the most enduring perceptions formed by buyers. Price communicates to our buyers where we belong in the market hierarchy, and that signal embeds itself far deeper than most of us realize. To an accountant, economist, or business owner, price is simply a number. But to a buyer, Price is a feeling. If we price low, we attract buyers who are mainly cost motivated. Sure, they may be buying from us because of other reasons as well, but when price is the main reason why somebody chooses us, price is going to be the main reason why they're going to leave us. And since there's always someone somewhere who's willing to sell something cheaper than we are, our customer base becomes permanently vulnerable to any of our competitors' next discount offer. At the same time, the wafer-thin profit margins that come with low prices demand absurdly high sales volumes just so that we can break even, let alone offer the option to invest in something that may differentiate us down the road. In effect, we're caught between keeping unsustainably low prices to keep customers who aren't loyal and will jump ship in a heartbeat if they find it cheaper, while at the same time we can't build anything better because there's no money to fund it. Now the numbers get worse the longer this continues. Thin margins mean we need exponential volume increases in order to make the same profit. That volume demand forces us to make operational decisions that push us deeper into running the business optimizing for efficiency rather than quality. What happens is we wake up one morning and realize our hopes to build the business on foundations like quality, differentiation, or service have disappeared a long time ago. Each choice we've made reinforces that original error until we've built an entire business architecture that assumes a permanent budget status. In effect, We've become a commodity. When they can't easily evaluate what they're purchasing, buyers look to the price of something as being an indicator of its quality. So seeing a lower price doesn't signal value to them. Internally, they're asking themselves, "Well, why is it so cheap? What am I missing? If it was any good, they'd be able to charge more for it." You know, that sort of thinking. So this kind of perception, once it's been formed, is extremely difficult to shift. If we raise our price later, all our existing customers feel betrayed, right? While the new customers who are being asked to pay the higher price, they look at us as yesterday's budget option that's now cosplaying at being premium. The businesses that build sustainable operations usually didn't start off by competing on price. They charged enough to allow for breathing room. Now sure, that means they didn't attract as many customers, but the customers they did attract were ones who cared more about just spending a little bit less money. These types of customers are also often more loyal and likely to buy again, even at a premium. So that additional profit margin allowed those companies the space to invest in actually becoming better rather than just cheaper. Yes, pricing above what we can deliver creates its own problems, but underpricing based on mistaking acquisition for growth might be the most common strategic error that's made in business. When we set a price, we're not just picking a number out of the air. We're not simply adding up costs per unit and slapping on a percentage on the top—cost plus percent, and saying that's the pricing. We're actually doing far, far more than that. Price— by choosing that price, we're choosing our positioning. We're defining what type of game we're playing. We're defining the buyers we'll attract and which competitors we're going to face. Low, low prices tell everyone that we're probably not worth serious consideration. But we're cheap, so there's that. But trying to change that belief later means rebuilding buyer perception from nothing, which is vastly harder than establishing correct positioning from the beginning. Thanks for listening. If you like what you heard, please pass it on. I'm not saying I'm right. I'm saying many out there are wrong. Please subscribe, share, comment, whatever works for you. Find out more at kexino.com. That's K-E-X-I-N-O. Hope to see you again here soon.