by Paul Hunt – President
Pricing low to gain volume is the oldest move in the pricing playbook; the laws of economics say that as you lower price, volume will go up. Therefore many companies that want to dominate a market, or are in a rush to grow in a new market, will use low prices to achieve their goals (e.g. Walmart, Dell, Private Label).
But where do you cross the line? When the price is so low that it communicates a lack of quality? It is certainly a tricky balancing act and it depends upon a lot of factors.
For example: the e-book market. As noted by Melissa Foster, an award winning author, “There seem to be two different schools of thought when it comes to ebook readers: there are those who will only buy 99 cent books, and those who refuse to buy 99 cent books, with the latter group fearing that the cheaply priced book must be of poor quality”. Furthermore “bringing books down to 99 cents throws them into the ‘impulse buy’ category, allowing their work to get into hands of far more readers.” Foster also adds that she ran an experiment where she priced her e-book for 99 cents and sold 60,000 one month and then raised the price to $2.99 and sales dropped to 20,000 the next month. The same amount of money, but a lot fewer units!
The .99 e-book price point is what I call “No brainer pricing”. The price is so low that buying the product or service is a no brainer for many people; they can buy the product almost risk free since the loss would be minimal if they are not satisfied. I see this strategy being increasingly deployed in the digital age because of low costs of distribution. Selling an electronic book is vastly less expensive than selling a hardcover book.
However, even companies that are not selling digital products will sometimes deploy this strategy. For example, a Denver based newspaper wanted to dramatically increase circulation and drive a competitor out of the market back in the 90’s. To do so it lowered subscription rates to 1 cent per day. This caused the subscriptions to quadruple! In this case the strategy seemed to work, but be careful; it can also damage a brand and ultimately may not be sustainable. Eventually, the paper had to raise rates and the result was that subscriptions dropped off dramatically. Whereas, In the e-book market the .99 price point can continue on forever as long as there are writers who are willing to sell their content for that price.
Another interesting phenomenon around the topic of selling ‘cheap’ is the emergence of Dollar Stores. The growth of Dollar Stores demonstrates that there are lots of products which consumers are more than happy to pay ‘cheap’ prices for. While Hallmark and Carton were insisting on selling cards for price points between $3-$4, the Dollar stores priced them at $.99. You can guess what happened; sales rocketed. Clearly, consumers have decided that a $.99 cent greeting card can be just as clever and appreciated by the recipient as a more expensive card!
However, let’s be honest; for some products the price can really be too cheap. When you buy your OTC medications do you look for the cheapest product? No way! When it comes to their health, most consumers tend to gravitate towards higher priced products. This is based on the belief that higher prices mean better quality and therefore better health treatment (e.g. quicker relief from back pain). Offering a pain relief product that is excellent at a price well below the competition has a low chance of succeeding. This is simply because consumers don’t believe that something cheap can be as effective as the pricier products.
In other words, from a consumer’s perspective the answer to whether you can price too cheaply is: “it depends”.