Often, what that means is taking your full featured product, reducing the feature set, and going after the competitor's price point. In reality, what it often means is giving up a premium margin so that you can stem the erosion of your customer base, optimistically hoping that your low cost competitors will be unable to maintain their low margin business. Depending on your product, you can push toward the next premium feature set, hoping to create a bigger gap between "a real product" and "a cheap knock-off".
The real problem arises when you have a set threshold of features and functionality and you don't have any way to lift your premium products. For example, if you've been selling the top 6-megapixel camera, it's easy enough to cut price and margin on that model if you roll out a new 8-megapixel camera -- the model is understandable so your early adopters and loyal customers won't feel like you took advantage of them. Everyone understands that technology evolves. But if you have an established product with a fixed set of features and you suddenly offer a lower cost version with the same capabilities, you force your customers to question all of your pricing.
For every feature and specification that your product carries, there are a host of hidden aspects that also contribute to a customer's purchase decision. These could range from the experience a customer has purchasing the product and your customer service to the sense of status that your customer has in owning your product. This perceptual framework shapes the customer's interaction with the product, and it's inherent to their perception of value.
Even though there may be no specific cost associated with these value-add elements, they add to an underlying sense of cost that a customer carries in their head when they are justifying and reconciling price in their own internal accounting system. Use a service like Uber to ride in a limo with leather seats and driver that provides you with a personalized experience, it becomes easier for you to justify paying a higher rate than you might for a cab even though the transportation portion of the purchase is essentially equivalent. However, imagine that the black car limo ride was the standard product and a competing service started offering traditional taxi rides, if Uber decided to eliminate service levels or charge lower prices on select rides, their customers would probably be unhappy if they found themselves paying the higher prices.
Pricing and the Fairness Effect
One aspect of aspect of pricing strategy and buyer's psychology is called the Fairness Effect. Essentially, this says that buyers will be more sensitive to the price of a product depending upon how they perceive the fairness of pricing. Basically, what happens is, when a buyer is able to compare pricing, their reaction to the price is directly related to what they consider as fair and, if the level of fairness is unequal, who they think was taking advantage of the other one.
A fundamental aspect of the fairness effect is the comparison that takes place. As people look for analogies and similarities, they are apt to make comparisons. Sometimes those comparisons are direct, but it's also possible that their comparison is based on something with little direct connection, like a memory or an anecdotal story. Comparing is how we build frameworks of understanding. At the same time, the more difficult it is for a buyer to make a comparison, the less price sensitive that they will be. This is part of the reason why the iPad was so successful, both as a scaled down device and as a non-conflicting fit within the product line.
Unfortunately, finding an iPad-like approach for adding a low cost product to the line is unusual. In most cases, your new low cost product is going to cannibalize your high end product, generate some confusion surrounding the differentiation, and frustrate (potentially anger) your customer base.
Cooking A Low Cost Sous Vide Product - A Case Study
Consider Polyscience and their line of immersion circulators for sous vide. Polyscience is pretty much the first company to market with this product -- they were making devices for this application before anyone else. The problem was, their initial device was essentially a scientific device and it cost over a thousand dollars. As sous vide grew in popularlarity among the foodie culture, a competitor introduced the Sous Vide Supreme, a counter-top water oven that was about the size of a bread machine that retailed for about $500. Polyscience's initial response was their Professional / chef series immersion circulator, a nicely packaged version of their high-end device with an integrated plastic enclosure that retailed for about $800. But the price target for the market continued to move down, and the Sous Vide Supreme team rolled out the Sous Vide Supreme Demi, a smaller version in the $300 range. Additionally, you could find a host of very low cost solutions on the web for $200ish.
Last year, Polyscience introduced the Creative series. The Creative series is nearly identical to their professional series externally and in most of the specs presented, but it retails for under $500. What's the difference between the Creative series and the Professional series?
- The display is different
- The Creative Series can only run for 99 hours at a time while the Professional one can run indefinitely
- The Creative Series pumps 10 liters of water / sec versus 20 for the Professional
- The Creative Series is "designed for the home chef" as opposed to the "professional kitchen"
- According the one sales rep at Crate and Barrel, the Creative series is made in China while the Professional is made in the USA
- The Creative Series actually adds a timer into the unit
So How Do You Add A Low Cost Product?
While there probably isn't a simple formula for this, here are a few strategic aspects that you might consider:
- Understand the market and what the real opportunity is within the low cost segment. Is it really worth cannibalizing your high margin product for a product segment that probably yields much lower margins? Put a different way, would any of the PC makers who were pressured to make netbooks be in any worse shape today if they not offered one?
- Make your low cost product, but have somebody else market it. Find an alternative outlet and sell your low cost product anonymously through that channel.
- Make your low cost product difficult to compare to your premier one. This presumes that the low cost product is a solution to a problem other than price.