Minding Your Own Brand: How Low Can You Go?

While judging a freshman business plan competition at a local university, I noticed a pattern. Each of the student groups said they were developing a premium brand, but they would use a low-cost penetration pricing strategy. Even though they were often selling at a loss, they explained that by entering the market as the low price leader, they would gain market share, people would fall in love with their product and they could raise their prices once they had built customer loyalty.

I could not think of any company that after entering the market with low-cost pricing, went on to be a dominant premium brand and could command an above market price. So, as a judge, I reminded them that “using this logic, they will develop a commodity level brand with very little loyalty and being a commodity is a hole few companies could ever hope to dig themselves out from.”

I know what you’re saying, “They are freshmen and have a lot to learn about business.” Hopefully these students have learned from this and will think differently when it really counts. However, this flawed thinking is not reserved for the business school novice because most companies can’t get it through their thick skulls that a low-cost pricing strategy doesn’t work and does not build customer loyalty.

Big box store “low-price guarantees” are creating a marketplace full of people who are fixated on price. Customers are no longer loyal to most brands and will switch from their “favorite” brand for a few pennies. These customers are loyal to low-price, not a particular brand. Because loyalty cannot be based on price, I would much rather see a company say that they were 10% higher than their most expensive competitor and then prove that they are well worth the price. This is a better positioning strategy than to bow to the unprofitable pricing practices that the current marketplace demands.

The only companies that have escaped this madness are the ones that realized a low-cost pricing strategy will never lead to long-term brand success. Once they stopped worrying about how competitive their price is and started focusing on their brand experience, they avoided being a low-cost provider and had a better chance at gaining customer loyalty. By doing this, they are seen as a premium brand which attracts true passionate advocates and builds a lasting relationship with their customers.

Customers will not become loyal advocates if you have lured them in with a low-cost pricing strategy. The only true way to build advocacy is to find a unique way to stand out from the crowd by providing extraordinary brand experiences. Unless you provide an extraordinary brand experience, customers will see you as a commodity and will lack brand passion. Advocacy only comes from people who create a true relationship with the brand and that loyalty is priceless.

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