As a business owner, your priority is to be efficient and reduce costs. However, it's important to recognize that your pricing strategy should not solely depend on cost-cutting measures. Failing to prevent your business model from becoming overly reliant on cost savings can limit growth and profitability and leave you vulnerable in an increasingly complex and global market. If you price your products or services based solely on costs, it's time to prepare for survival mode.
The symptomatic problems of depending on costs are:
- Your business survives only by reducing costs and increasing efficiency. In an endless spiral.
- Your employees' salaries are increasingly low, and it becomes difficult to attract the talent you need to grow.
- Your business has a low pricing strategy, making it difficult for you to increase prices for fear of losing customers who only see value in price.
- Campaigns only work based on offering discounts and deals.
- It becomes impossible for you to reserve a budget for activities on which the growth of your business depends.
- You must delegate part of the production to third parties or third countries, even if it is negative for the structure and workflow of the company.
- You are reluctant to invest in new technologies or innovations despite the obvious benefit they would bring due to the costs and risks that would not produce as expected.
- A new competitor is in the market, and you can only position yourself against them by lowering your prices.
- The actual customers value your service or product very much, but you are unable to attract new customers.
If your business is in this situation, how can you free yourself from cost dependence? The answer lies in the fundamental question of marketing. "What makes your product, services or brand (potentially) valuable to others?". Identifying what makes you valuable is the key to the success of any business.
Consequences of cost dependency.
Are you finding that your business is stuck in a rut of cost dependence? When you cannot identify your value, you cannot include it in the price. If you cannot include your value in your price, it will result in a price dependent on costs alone. This dependence can devastate your entire value chain and business model.
When you depend on cost, you cannot improve your position in the market if you are a large company, but you also cannot survive if you are a small company. All small business owners always have the passion to bring new things and always need more money.
- Stagnant growth: It will be difficult for your business to increase prices without increasing costs, which can limit your business's growth opportunities.
- Inability to innovate: Your business will find it almost impossible to invest the necessary budget to create innovation or offer new products or services that allow you to differentiate yourself from your competitors.
- Poor profit margins: Profit margins can be scarce or non-existent, making it difficult to reinvest in the business or develop new products and services.
- Inability to adapt: Investing in new technologies, processes, or innovations that can improve the customer experience or increase efficiency in production or service, no matter how necessary, becomes an impossible task.
- Lack of impact and effectiveness in marketing: If you cannot adequately communicate your value, you will have difficulty achieving results, and your marketing and sales activities can become a bottomless pit of wasted resources and money.
- Lack of pricing power: If a company's pricing is only linked to cost, it can be difficult to increase prices to reflect changes in demand, limiting the company's ability to respond to market conditions and risk underestimating or not being able to compete in the market.
- Loss of knowledge and inconsistency in the company's culture: If your company is forced to outsource to other companies or move production to other countries to save costs, this can mean losing control over know-how and, worse, creating a heterodox business ecosystem that fosters a conflict of values that not only reflects internal inefficiency but also affects your services and products.
- Loss of control over your value chain: When you move part of your business to other countries or other companies, you risk losing control over your business's value chain based on external agents over which you have no control. A war, a change of government, or a lack of resources can put years of work at serious risk.
- Absolute weakness in the event of disruptions. Technological disruptions killer applications (Uber, PayPal, Amazon, etc.), usually focus on creating new ways of systematizing, digitizing, and being much more efficient in cost management and convenience. It is impossible to compete in costs and convenience against them.
But how do you identify what makes your product, service, or brand (potentially) valuable? Knowing the answer to this question is the key to unlocking success for any business.
3 steps to avoid cost dependency.
Remember that value is determined by external perception. It is not just about having an inherent value but also being able to convey that value to others. Pricing your product or service is not just about costs but also the perceived value. You can justify a higher price point when you understand what differentiates you from your competitors.
THE VALUE IS DETERMINED BY THE EXTERNAL PERCEPTION IS
Once you have identified the actual value or potential value of your service, product or brand, you can translate it not only into your pricing strategy but also into your marketing, branding, content, or sales strategy. Corporate design, television video campaign, website, inbound content, what do all these marketing activities have in common? They have the same goal: to communicate value. Communicating value is one of the steps in the value chain of any company. We cannot communicate value if we do not know what value we should communicate. Logical, right? Well, to communicate value, we first have to identify the value. By understanding what sets you apart from your competition, you can effectively communicate your value to your customers through your marketing, branding, content, and sales strategy. And guess what the fundamental question is that we must ask ourselves to be able to identify value. Exactly. "What makes your product, services or brand (potentially) valuable to others?"
Step 1: Identify the value of your product or service.
Identify your services, products, or brand for which people are valuable. Ask yourself the fundamental marketing question: What makes my product, service, or brand valuable to my customer? To answer this question, focus on two aspects: what needs, problems, or desires does my customer have? What other solutions or brands are out there that are valuable to them? How can I bring something to the table that they can't? Is it the quality of your product, the convenience of your service, customer service, or unique problem-solving capabilities?
Step 2: Make sure you communicate your value.
Make a list of all the touchpoints where your company or brand is found: social media, website, advertising, and catalog. Review the content and the way you communicate. Do you clearly communicate what you identified as valuable in the previous step? Make a list of the touchpoints you need to improve and the clear message to communicate.
Step 3 Create a value funnel.
Use campaigns, content, or other marketing activities such as mailings to actively communicate that value and capture the value you have generated. Make sure that all activities are part of this value funnel with clear steps at different levels, starting with free and easy-to-consume content, step by step, up to more complex products or services with higher costs.
These 3 steps apply to all businesses, regardless of the size of your company, from local stores to multinational corporations. If you do not carry out these three steps properly you will inevitably end up stuck in cost dependency. Even if you are a local store, a restaurant, or a clothing store in Barcelona, Leon, Seville, Mexico City, or Buenos Aires, and you depend on costs ... Well, in that case, I'm sorry to tell you that Amazon always wins.
Why Amazon (almost) always wins
Why is that? Amazon, of course, can offer super competitive prices because it has radically reduced its costs with a revolutionary business model based on a completely systematized value chain that leverages all the benefits of a global, technological, and interconnected world. It's called a killer application. A disruption in the market based on the use of technology. Amazon would have been impossible 50 years ago."
Although it may sound incredible, the success of Amazon is not based solely on having the lowest prices, even though it has the structure that allows it. While it certainly helps, the company provides more value to its customers than just low costs. As bad as it may sound, as much as it may hurt, Amazon is providing more value to its customers than you are. In fact, even if your company offers a lower price than Amazon for the same product, it is still highly likely that Amazon will come out again on top. Remember, Amazon always wins. But Why? Because Amazon offers a clear added value in convenience.
AMAZON OFFERS ITS CUSTOMERS MORE VALUE THAN YOU DO
The value of convenience cannot be overstated, as it addresses the most significant pain point in our daily lives: lack of time. Customers are willing to pay more to easily shop from home, compare products from different brands and distributors at their fingertips, and receive their purchases without leaving their couch. Amazon understands this, so it has grown its video platform and tied it to its Prime subscription. Now customers can save on shipping costs while simultaneously distracting their children with Paw Patrol, so can you rest for 5 minutes more on the couch. 2 for the price of one.
As easy as it is to complain about Amazon being a big company that destroys small businesses, the reality is that Amazon has become a big company by using empathy as the key to success. They call it customer obsession, which is really a value-based strategy. You make customers' problems and needs drive decision-making. You go all out to create value for others.
The question then should be, how can my company offer more value than Amazon? What can I provide to my customers that has value that Amazon cannot provide? What meets their needs and solves the problems that Amazon cannot solve? This is where identifying and effectively communicating the unique value of your product, service, or brand comes into play. All companies have the potential to provide value to their customers, All of them.
In summary, it is not wrong to want to reduce costs. In fact, it is a mandatory task, and one of the first objectives of a company is to be efficient and reduce costs. That is very important for a company. One thing is to reduce costs, and another is to depend on them. Identifying and effectively communicating the unique value of a company's product, service, or brand is essential for any business's success.
Value-based marketing strategies help create and offer brands, products, and services that customers perceive as valuable. They not only differentiate you from your competitors but also play a critical role in the success of your business.
Co-founder Tomorrow Brands
Marketing and branding strategist
Passion for storytelling