Often I encounter clients that want to produce a product or service on the low end of the price window in the hopes that lower costs will mean more business for them. However, being the low-cost provider is not the best place to be unless your value proposition is clearly operational excellence. This is because unless you are the most efficient provider, with something like Wal-Mart’s economy of scale, someone can undercut your costs.
In fact, your competition might very well come from an ignorant competitor that does not have a handle on his true costs, dragging your prices and margins even lower than your break-even point. Also, lower costs often are associated with lower quality. Remember, a person is ten times more likely to complain about a poor product or service than to rave about a good one.
Bad publicity can cripple a business. Moreover, a person who paid $10 for a $100 product or service is more likely to complain that it didn’t meet their expectations than a person that paid $1,000 for the same $100 product or service. That customer is more likely to write off the loss and just move on. On the other hand, higher quality means higher profit margins, higher customer satisfaction, lower return rates, and less customer service and damage control expenses.
Is your business fighting to be the low-cost provider, or should you be focused on becoming a high-quality provider?
