The price of something, the demand for it goes down right?
When you raise the price of something, the demand for it goes down right? Not always. There are a few important exceptions to this rule that you should know about. In fact, sometimes raising the price can actually increase your sales volume.
Have you ever gone looking for something you don’t know a lot about? Things like a computer, a portable music player, or an appliance. You know what they do, but you know deep inside that you couldn’t spot a good one from a bad one on your own. What do you do? Well I tend to go out and find a range of products with a range of prices. Even if I’m looking for something basic I usually don’t buy the one that’s the cheapest. Why? Because I wonder what’s wrong with it that they can sell it cheaper than all the other kinds.
There’s a perception that the lowest price equals the lowest quality, and we don’t want to get stuck with the worst product or service available. So what do we do? We buy something in the middle of the price range because it makes us feel more secure. The fact is there may be nothing wrong with the least expensive alternative except that it’s priced wrong.
Here's a business management tip for you. If you are the lowest cost provider in your market, try bumping your prices up above your least expensive competition and see what happens. In some cases you will see increased sales volume just because you are no longer perceived as the lowest quality solution. In most cases you need to maintain a good price, but the lowest price is not always the best.
So somewhere in the middle is often a good pricing strategy, but there is one category in which the highest prices actually attract customers. This exception to the normal supply demand dynamic is luxury items. There are certain items that people buy for the prestige. Things like a luxury car or a yacht fall into this category. So do some types of stereo equipment or vacations. People buy them because they are expensive, not in spite of the fact they are expensive.
In the case of luxury items a price drop can actually reduce demand. What's the point of owning a BMW if everyone can afford one? BMW are high quality cars, no doubt about it, but they are also attractive because not everyone can afford one. When you drive up in one, people say "wow, is that what you drive? You must be doing very well". We like that.
In the case of high end luxury items you need to remember that you are selling to people's egos, not to the logical side of their brains. A major part of the attraction is having something that not everyone can have. That's part of what makes it special. The more affordable it is the less prestige goes along with owning it.
So the next time you have the urge to lower your prices to undercut the competition think carefully about whether or not that's really the right thing to do. In some cases lowering the price can drive people away from your products and services instead of attracting them to you.
Questions and Answers
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