What you need to understand about my business is that people only buy on price…
I’d have a huge Tribe of Goats…
Let’s be really clear…
People only buy cheap – if you let them…
If the price was the ONLY determinant for a sale then everyone would be driving 1972 Ford Fiestas and using Nokia 3310’s…
A couple of examples – all Brexiteers should look away for the first one…
No 1 – Luxembourg Fuel Prices…
Luxembourg is a small country nestling between France, Germany, and Belgium – it is also one of the richest with a GDP per capita of around $110,000…
For reference, the UK has a GDP per capita of around $41,000 and Germany around $47,000
And yet it has some of the cheapest fuel in Europe – uniquely, maximum prices for fuel are set by the Government. This means everyone wants to fill up their cars in Luxembourg…
And strangely every Fuel Station charges the same Maximum allowed price…
Those scarcity driven types would say – just charge 10c per litre less and you’ll get all the business, grow sales and dominate the market, but of course, that won’t work for a number of reasons;
- Margins are too tight to make a profit on discounted fuel…
- The Marketing spend to inform everyone about the cheaper fuel would negate any increase in volume…
- It would start a destructive price war and no one would win.
- The queues and waiting times for those who bought there would outweigh the potential savings…
So how do the Fuel Stations differentiate themselves and stay in business…?
The price pulls people into Luxembourg, locals, cross-border workers, tourists, and holidaymakers go there just to get fuel – it’s the same price on the Autoroute as it is at the Supermarket…
So they have to differentiate themselves by other means and make strategic choices to maximise income and profitability…
- Location – ease of access is key for many of the stations – they are grouped around the border crossings on the major routes making it easy to find them…
- Scale – the Berchem Service Station is the biggest in the world …
- Cross-selling – tax laws around tobacco mean that Luxembourg is 18th in the EU when it comes to duty. Fuels stations double as shops for tobacco and associate paraphernalia, attracting people who just happen to get their fuel at the same time…
- Clean & Modern – even the cows are jet washed in Luxembourg – so are the forecourts. Car washes, cafes, food outlets, wine, and beer are all sold in order to attract the drivers.
And it works, no one discounts the fuel and dominant positions can only be gained by the strategies above…
What else can you do in your business to avoid discounting…?
No 2 – Anchoring and Associative Pricing – the Halo effect…
If you want to sell a £1500 Watch – sit it next to a £10000 watch and allow the anchoring effect of perceived value to help buyers make what they feel is a logical choice…
Let’s talk about beer…
Most of us are clueless about the concept of “value,”
Ref – William Poundstone, author of Priceless: The Myth of Fair Value.
Poundstone presents a study around the purchasing patterns of consumers over a selection of beer – with interesting results…
Test #1
Given a choice between two Beers, four out of five chose the Premium Beer – for 100 people the sales for this scenario would have been $236.00
Test #2
Adding a cheap Beer to the mix changed the buying dynamic between the same or similar 100 People – for 100 people the sales for this scenario would have been $194.00
Test #3
Removing the cheap option and adding an exclusive beer changed the outcome again – for 100 people the sales for this scenario would have been $255.50
So what we are seeing is purchasing decisions based on association and anchoring, not the actual price point itself…
You don’t have to actually SELL the premium product – just HAVE one so it makes the others look good…
The Halo effect of the $3.40 product cascades down and synthetically illuminates the perceived value of the other products – Prices are simply a collective hallucination…
Building a range of services or products to give people the choice, whilst anchoring premium products helps to raise the profile of the range – think Toyota & Lexus etc.
What’s your range like – how can it be improved…?
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