Reed K. Holden and Thomas T. Nagle coined the term Kamikaze pricing to refer to companies’ engaging in dive-bombing price wars that lead to a race to the bottom where nobody wins.
So much advertising focuses on price that we forget that customers buy for other reasons, too. After all, how many people do you know who buy exclusively from Wal-Mart? Or who eat exclusively off fast-food dollar menus? Is price a factor? Certainly. But most people actually prefer high-quality-at-a-fair-price to low-quality-at-the-lowest-price. (Holden, 1998)
Can you compete at the bottom?
Who has the lowest prices in your industry? If you sell clothing or basic products, the answer is probably Wal-Mart; if you sell services, the answer might be a virtual assistant in India, and so on.
How much do they charge?
If you charged that much, could you make a profit?
I mean, really make a profit? Not only make more than you spent on the product, but pay your office rent, buy pins and paperclips, cover the advertising costs, and still have enough left over to pay yourself a living wage?
If the answer is yes, then you have to decide if you want to compete on the basis of price. Read on, then make your decision.
If the answer is no, then you’re not competing on the basis of price.
- I want you to sit down and write that 100 times: I am not competing on the basis of price. Or put it on a sticky note by your sewing machine or drill press or laptop. Or whatever else it takes to get that idea into your head. I am not competing on the basis of price.
Since you’re not competing on the basis of price, you want to take price out of the equation. This is called a neutral pricing strategy, if you ever need to impress someone.
How do you do that? You charge (essentially) the same as your competition. Not your lowest-price competition, but the people who actually sell the same stuff you do. How much do most artists charge for a one-of-a-kind shirt? How much do most business consultants charge for an hour of assistance? How much do most ebooks charge for a high-quality document that can really help you solve a problem?
Find a couple of genuine, equal-value competitors. Take the average of their prices. Round that to the nearest dollar. Charge that.
Compete on the basis of something else
Now, when prospective customers look at your prices, they’ll think to themselves, “OK, so basically the same as everyone else.” And having established that the prices are basically the same no matter where they go, they’ll forget about prices and start looking at what they can get for their fixed-amount-of-money.
This is where you have a chance to shine. What can you do better than your competitors?
- Make a product that’s more durable?
- Make a product that’s more flexible, more useful in more situations?
- Make a product that fits better with their values (environmentally-friendly, free-trade, etc)?
- Be more responsive to customer requests?
- Stick with it until you’ve given the customer exactly what they want?
- Randomly upgrade some of your customers to overnight shipping?
Not only will you make more money, but you’ll have a lot more fun.
Resources for Further Reading
You Need a Business Plan — Maybe
Marketing for Entrepreneurs: Should You Sell on Price?
Holden, R., Thomas (1998), “Kamikaze Pricing”. Marketing Management, Summer pp. 33-39