In a Ted talk (http://www.ted.com/) a few years ago (http://www.ted.com/talks/lang/eng/malcolm_gladwell_on_spaghetti_sauce.html), Tipping Point author Malcolm Gladwell spoke about the role of choice in buying decisions. When discussing pasta sauce, the manufacturer wanted originally to know what the customer wanted. From that information they would craft a product to fit customer taste. Was the customer demanding chunky, spicy or smooth pasta sauce? Market research came back with a carefully crafted statistical analysis showing that most people wanted smooth. Gladwell disagreed with the conclusion.
By offering only smooth pasta sauce, they would have missed market niches looking for chunky and spicy with a consequent loss of market share in pasta sauces. So the statistical answer was correct but insufficient for a business decision.
When you look at coffee sales, you get the same results. In focus groups some people will tell you that they like bold coffee with lots of body. Others like lighter roasts and yet others like it milky. But an homogenised market survey will show that statistically most people drink weak, milky coffee. Again, making a coffee for the mainstream market means foregoing some market share. Taking the statistically significant middle ground means that portions of the market on either side of the middle are not served by your product or service.
But too much choice is a sales killer. People like choice but not too much choice. They want an economical option, a middle of the road offering and a quality choice. They don’t want 57 choices because it is just too much information to have to absorb, digest and thereafter make a decision. Three or four and never more than 5 choices is best in order to facilitate an easy buying decision.
Too much choice, as a study of dating sites revealed (Economist: Modern Matchmakers; http://www.economist.com/node/21547217) leads to confusion leading to no transaction at all or where the potential “customers” boiled down everything to the lowest common denominator. On dating sites, and in speed-dating, the lowest denominator became physical attributes. In the business world that equates to price.
Sometime in the late Jurassic, I worked for the largest appliance distributor in Western Canada. Although not directly involved in the sales operation, I went along to a sales meeting in preparation for a huge week long sale being mounted in Vancouver. The sales manager Derek, advised the sales staff that, of the 3 models, model A was the one with all the bells and whistles and sold for the most money. But there was limited inventory, so don’t focus on selling this one. The middle version was the one with the most inventory and best gross margin. This is where the effort should be focused. The 3rd model was the cheap and cheerful model being heavily advertised. The sales manager advised them that if they sold a cheap and cheerful model, he would fire them.
Can you use this strategy in your business? Are you offering an homogenised product at an homogenised price? Are you leaving money on the table? Are there customers who would like the best option and are prepared to pay for it? Are you missing out on sales of an economical product or service that could increase your brand recognition, walk-in traffic and overall revenue?
Can you offer a good – better- best option?
Think of your struggles against the big box stores and their purchases of overseas products. The box stores sell on price alone and can beat you on price every day of the week. But they do not typically offer anything more than the cheapest available. But you can. On any given day, I might need a hammer. How will you get my sale? I go to your store and you have the cheap and cheerful hammer made in China item selling for $9.99. Right next to it you have a made in Canada model selling for $19.99. Today I have $15.00 in my pocket, so I buy the offshore product. I am not a contractor and use a hammer 4 times a year, so I don’t need the best, just something that will frighten the neighbours. The contractor behind me buys the best he can afford knowing that a broken tool means lost time and money out of relationship to the EXTRA cost of the hammer.
In the final analysis you cannot know your customer’s purchasing power without asking for their budget. You cannot know if the customer is a contractor or a weekend warrior, unless you ask lots of questions. In the absence of good information, offering a choice of products in a tier of prices is the best way to capture all the market niches and build your business.
Begin that business turnaround today and choose a great pricing strategy.
By Andrew Gregson