The Real Costs of Lowest Price
You’ve heard it before and you’ll hear it again. According to many marketing professionals, competing on price is a losing strategy. Yet it seems everywhere we look, advertising pitches goods and services with a proposition based upon price advantage. To remain competitive on this front, brands must push their costs lower, in turn demanding the lowest price from their suppliers creating an endless downward spiral. With a keen ear, we’ve noticed that a lot of terrible things happening in the world have been rooted in a low-cost focus. So we have to ask ourselves, how low can we go? What costs will we consider to be greater than price? At what point will we demand to pay more for greater assurances of quality? Just think of these recent examples:
BP, of course
We couldn’t overlook one of the greatest disasters of our time because once you look past the vast destruction of the spill, what is unanimously cited as the root cause of the spill is an over-emphasis on cost reduction ahead of safety.
A bold new car from Tata Motors proclaimed itself the least expensive production automobile at just $2,000 to the delight of many, yet once on the road it was clear that turning the ignition could literally ignite the car. Great visual aid, that photo of the car in flames!
Once lauded for it’s value and safety record the brand suffered significant damage with a string of massive safety recalls in 2009 and 2010.
Indeed many products cost less now than they did years ago. Technology has streamlined processes, opened up the world’s labor forces and cut the costs of doing business. At the same time comparison shopping and price transparency have turned the lowest price proposition, once a marketer’s differentiator, into a consumer addiction. This price transparency, you could say, is forcing even the brands in the premium space of each category to compete on price. All of which has lead many to proclaim this the age of the consumer. Yet it seems consumers are in fact less satisfied across a variety of categories than they were in the past. While we’ve gained price advantages, we seem to have lost many of the consumer experiences that create satisfaction and loyalty.
Now of course we all like to save some cash, but is the lowest price model still sustainable for marketers or the world? I don’t think so, here’s why:
- You simply can’t win on price.
There’s always a provider of the lowest price widget, but it’s never the same provider for long. New entrants, promotional discounts, varied business models and a variety of other influences are constantly changing cost models for each company in a unique way. As a result, the lowest price position is never held by one company indefinitely.
- Innovation is expensive.
In virtually all businesses profit is made by delivering on a principle product or service for which there is a known consumer demand. The consistency of this revenue stream allows companies to make their fulfillment efficient, increasing profitability and then allocating a part of that profit to innovation. But downward pressure on the price of the primary product or service can affect the allocation of budget between innovation and quality.
- Businesses are like sharks, they have to keep moving or they die.
If a business can’t innovate its days are numbered. So when budgets are tight and it’s quality vs. innovation, it seems safety, regulatory adherence, best practices often take the cut despite the risks.
- Loyalty is based on quality.
Once customers believe that quality has been lost and price is the only USP, loyalty will be gone forever. We often think of quality customer service as an under-appreciated marketing channel for this very reason.
- Without loyalty, revenue becomes inconsistent.
Inconsistent revenues often means that the core customer has walked away and the primary revenue stream is subject to the turbulence of too many external factors, threatening investment for either quality or product innovation.
- Tight margins turn problems into catastrophes.
Without a focus on quality and loyalty, shortcomings become catastrophes very quickly. Catastrophes are very expensive and often insurmountable.
But that’s just my opinion.
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