SME blogger Steve Grice says firms could learn a lot from the introduction of the 99p burger...
How many people buy a 99p burger?
When McDonalds introduced a lower priced option on their menus a few years back, they demonstrated a great pricing strategy – to drive business in a downturn, you need to show that you can adapt to customers’ changing expectations.
The basic idea goes like this – if your product starts looking expensive, then you create a lower-cost, stripped-back product that sits below your main lines. Charging less for this new product will inevitably mean some cannibalisation of your existing customer base, but it will also prevent loss of customers to your competition.
So, why not just cut prices on your main product line? Why go to all the trouble of sourcing, costing and promoting a new range? There are a number of good reasons, but chief amongst these is that if you simply cut your prices on your main lines, you will have difficulty putting prices up again. A good secondary reason is that an ‘entry-level’ product range will attract more customers from competitors who do not pursue this strategy.
It’s a fairly straightforward strategy to apply if you’re a large retailer, but what if you’re a smaller B2B business?
Let’s say you’re a distributor of air conditioning equipment to the trade and you have a main, branded supplier that has a reputation for high quality units. Imagine that lately you’ve seen sales decline as a result of customers perceiving your prices to be too high. The knee-jerk reaction would be to lower prices. This means you have to make savings in other areas of your business – sales or admin maybe. The reduction in margin may even mean you make a loss. You will inevitably find it extremely difficult to raise prices later on.
A better strategy would be to find a supplier of an alternative aircon unit that you could sell alongside your main brand – it has a lower price point, but the margin you make on it is the same or even a bit more than you make on your main line. You may need to do this via a separate company to preserve the integrity of your main line, but at least you’re now only losing price-sensitive customers to your other company rather than to a competitor.
This is an approach that many businesses use – all the main car manufacturers have ‘entry-level’ models; major supermarkets have economy ranges which have become more prevalent through the recession; a walk around B&Q will show you the value ranges in their tools.
And while you’re eating your 99p burger, consider the amount of effort and strategic thinking that’s gone into it…
Steve Grice is a Business Development Manager for the Black Country Reinvestment Society – a non-profit lender to SMEs. His views are entirely his own and are not necessarily representative of his company.