Climbing Out of the Lowest-Price Trap

Price is not king. Not on the Internet, not anywhere.

Now don’t misunderstand. Price is a critical attribute of any competitive product. But let’s not place it on too lofty a throne.

No one wants to pay more than she must to buy what she wants. Who doesn’t seek good value? But a fair price and a good value are entirely different from the lowest price.

Among e-tailers, the argument usually goes something like this: “My visitors are just a few clicks away from my competitor. If they see the competition has a lower price, I lose the sale.”

That’s certainly true. A portion of your visitors will always scavenge for the lowest price — but only a portion.

Playing the lowest-price game is a losing battle for many online retailers. The casualties are profit margin and, often, sanity. Businesses scramble to meet low-price demands and chase customers who pimp their loyalty for a nickel in savings. Playing the lowest-price game just isn’t any fun.

If you want to elevate your site’s offerings above the messy low-price battlefield, there is a way. Start by letting go of the coupon-clipping, penny-pinching customers, and end by delivering more than visitors expect.

Angels and Devils

A recent Wall Street Journal article chronicled Best Buy CEO Brad Anderson’s bold move to split his customers into two categories: angels and devils.

Anderson’s strategy is simple: Angel customers are profitable; devils are not. Why commit valuable resources to win devil customers? Best Buy figured out it wasn’t about the best price, but about giving the customer the best buying experience buy.

Angel customers are savvy, but not price motivated; they buy consumer electronics and DVDs without waiting for markdowns. Devil customers siphon profits by snapping up all the loss-leader and deeply discounted merchandise. Devils will go to heroic lengths to save a dime. They’ll even return merchandise to purchase it later at an open-box discount.

The article cites the following:

[Best Buy] consultant Larry Selden, a professor at Columbia University’s Graduate School of Business… has produced research tying a company’s stock-market value to its ability to identify and cater to profitable customers better than its rivals do. At many companies, Mr. Selden argues, losses produced by devil customers wipe out profits generated by angels.

Marketing expert Roy H. Williams has different labels for the angels and devils: relational and transactional customers. He’s long specialized in helping businesses win the more profitable relational customers.

Traffic Quality

Arguments against blowing off customer segments revolve around the premise that more traffic equals more sales, and sales are critical to a company’s performance. Many sellers are reluctant to let go of what they perceive to be the bulk of their traffic.

Let’s dig deeper into the traffic argument. Is this traffic volume all it promises to be?

Nothing in life is free. Although devil customers get a better price, they pay for it with time spent in the hunt. Devils would rather waste time than money. They go from site to site, store to store, periodical to periodical, coupon to coupon to find the absolute lowest price. This body of activity makes it appear that devils comprise a larger portion of traffic than angels do.

Angels research less. They’re low maintenance. They’d rather pay a little more to save time and hassle. They rely on relationships with particular vendors or brands. If their questions are adequately answered, their motivations addressed, and their confidence secured, they come in, get the product they want, and get out. Their body of activity is much smaller.

Williams estimates transactional customers represent 70 percent of the sales volume for an average seller, while relational customers represent 70 percent of the profit margin.

So even if the bulk of convertible traffic is devils, will their patronage really deliver the return on investment (ROI) companies hope for?

Add Value by Boosting the Personal Experience Factor

It doesn’t matter if you’re selling sought-after brands or commoditized, price-driven products. If you’re weary of fighting for customers with nickels and dimes, there’s an alternative. Product attributes such as price are only one part of the Web site performance equation. You can construct a site that delivers such a favorable visitor experience (before and after the sale) that angel visitors won’t even consider hopping to a competitor due to price alone. After all, do most people buy books online at Amazon.com and Barnesandnoble.com, or from CheapestBookPrice.com?

Developing personas gives you insight into exactly what motivates these customers. Persuasion architecture creates paths that don’t just meet their needs but potentially exceed them.

Yes, it’s easier said than done. If it were easy, everybody would be doing it, right?

Knock Price Off the Throne

Price isn’t supreme, but lacking something else for customers to get excited about is what allows that loud-mouthed, parasitical thug to reign supreme.

Knock price off the throne. Don’t cater to price-gouging customers. Provide relational customers with products and service that exceed their expectations.

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