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Quit Competing on Price and Quality: The Secret to Creating Higher Profit Margins

Quit Competing on Price and Quality: The Secret to Creating Higher Profit Margins

March 18, 2008

While all the MBA wanna-bes are studying marketing theory from PhD's who have never run a business in their lives, I can tell you the best place to learn about what works and what doesn't in business is to get out from behind the desk and see it for yourself.

Take my local fish market, for example. You have sellers and buyers all in one place exchanging goods for money. Business professors will tell you it's the quintessential marketplace and the seller with the lowest overhead and lowest prices will win.

I'm here to tell you, that's all wrong! It's no wonder that 80% of all businesses fail in the first 5 years if we have these types of teachers advising business owners.

Cutting costs is not the answer!
The idea is not to offer the lowest price or to reduce your overhead! The idea is to offer your market something different from your competitors that has a higher perceived value.

I call it creating a "competitive bubble." The goal is to put yourself inside that bubble so no else can be compared to you.

Take the fish market as an example. Every business person is selling fish. And every customer is deciding who to buy from based on only two things: price and quality.

For the seller, that creates a pricing trap and whoever has the lowest prices without sacrificing quality will sell more fish. That's not the game you or any successful business person wants to be in. Instead, you want to give buyers another reason to buy from you and pay you even more than your competitors.

The answer: Create a higher perceived value
You want a completely different measuring stick. Create packages and offerings that can't be compared. It's all about perceived value. What does that mean? That means that you create a product that's far more valuable than what it cost you to produce it.

That's why Donald Trump can sell a an online course on how to make money as a real estate investor for $995. It only costs a fraction of that to produce the course, but many people are willing to pay nearly $1,000 to hear a self-made multi-billionaire share his advice in hopes that they too will make money just like The Donald. No one is thinking about how much it cost Donald Trump to produce the course and whether $995 is a fair price. They're thinking about how much they can potentially make using his guidance. In fact, I'd argue that if he offered it at only $19.95 you would probably be skeptical about how valuable it really is to you.

Take the lesson Jeremy Shapiro learned as co-founder of Foreclosures Mass, a real estate investment service that specializes in the foreclosure market in Massachusetts. To help new clients get started, he and co-founder Sheila Farragher-Gemma held a one-day seminar for $495 and had about 500 people attend. At the next one, the increased the price to $595 and had even more people attend.

If it costs more, it's got to be worth more!?
So we said, 'Wait a second. Not only are we making more money per head, but we're getting more heads in the room,' Shapiro said. 'If it costs more, it's got to be worth more' Not only were people OK with paying more money, more people would sign up if it costs more money, which is so counterintuitive to how I used to think.

So what was next, a test at a price of $995 or $1,995? 'We tested the $6,000 price,' Shapiro said. 'We said, "What the heck. Let's test this theory."' They jumped the price up to $6,000, expanded the course to a 2-day event, allowed attendees to bring a guest and although they had fewer attendees, they made just as much money and brought in much more loyal clients who spent more money with them over the long run. "I'm happy to have fewer customers and making a lot more money," Shapiro added.

So many people go into business thinking, "I'm going to do it cheaper" or "I'll always have a business because I'm less expensive." The problem with that is that there can only be one cheapest. By the same token, there can only be one most expensive. And then there's everyone else in the middle. So if you're not the cheapest and you're not the most expensive you must compete on something else and that something else is the value you offer in your competitive bubble.

What's the best way to create a competitive bubble?
One of the best ways to create a competitive bubble is to create a system you can sell. Donald Trump isn't just selling his advice, he's selling a system to help others invest in real estate like he did. Jeremy Shapiro isn't just selling information, he's selling a system that shows how to buy and sell foreclosed properties in Massachusetts.

Let's say you wanted to teach people how to fish. You could give lessons and charge $30 dollars per hour. If you spent three hours on lessons at the end of the day you would have $90. As you can see, there is no leverage here. But if you offered a system and sold it for $395, you would make far more money.

Let's look at the future of both of these businesses. In an average eight-hour day, you could give two sets of fishing lessons at three hours each. The other hour you would need to sell your services and set appointments. At the end of each day, you would earn $180. You would have to sell 10 lessons per week or 500 lessons per year. The maximum you would earn is $900 per week or $45,000 per year. This gives you about two weeks off for vacation. Here?s the rub, if you are ever sick, you lose money. If you ever want to take time off, you lose money. You will never make enough to buy free time or afford employees to work for you because there is simply not enough money in the dollars-for-hours swap.

Now let's look at the business if you sold a system teaching others how to fish at $395. You would only need to sell 10 per month or a little more than two per week to earn the same as giving lessons and trading dollars for hours. Let's say that for every five systems you sold, you would have to give one hour of your teaching time. That means you would only be required to invest two hours per month in private teaching time. The rest of your time could be leveraged in growing your business.

Here's an example of what your system might look like:

  •  3 CDs of you talking about how to approach a fishing hole, what to look for and how to read the water and weather conditions.
  •  3 DVDs of you demonstrating in a video everything a viewer needs to know to catch more fish.
  •  How-to manuals for users to refer back to when needed.
  •  Sample lures.
  •  Maps of the best fishing spots.
  •  A special report on the best bait to use and where to get the bait for free.
  •  And lastly, you can include some of your time that they would have to request (up to one hour).

You've now created a competitive bubble that few competitors can compete with and you're still meeting a need in the marketplace with a unique offer. Your prospects can't compare you with very many others in the market so you're no longer competing on price. And few can offer the same value you have to offer. As a result, your margins will be higher and you can spend more time marketing and leveraging your business instead of working in your business.

3 questions to help you create a competitive bubble in your market
1. What advice or information do customers or clients want from you?
2. What products or services do you already have that is different from your competition?
3. How can you leverage those competitive advantages to develop a system you can offer that teaches others how to do it themselves?