When Price Doesn’t Matter
When a product isn’t selling, there is a temptation to blame prices as being too high. Lower prices should increase demand, no?
In a few situations, not at all.
Sometimes, simply the wrong customer is being targeted. Or, rather, who you think is your customer is not really your customer.
I am, sadly, allergic to shrimp. It does not matter if there is a shrimp dish on the menu for $10, $50, or $100. I won’t buy it.
If a restaurant has a shrimp dish worth $100 and they try to appeal to me with a discount, it will have zero effect on my purchase behavior. It will, however, damage their perception and profit margin with every other customer who is actually relevant.
In business settings, sometimes this manifests with playing the pricing card with a technical user when the product simply does not do the required job. If a potential customer needs software to help structure their rebate management and your CPQ software does not have a rebate capability, then end of the story. Lowering price will not entice that prospect to buy.
Primary demand is when your product has use in and of itself to the customer. Hamburgers, hammers, and hang gliders all have primary demand. Raising and lowering the price of products with primary demand will have effects on the level of its demand and the interest of different customer segments.
Derived demand, in contrast, is when the demand for your product is dependent on the demand of another product. Your product may be a component of a larger assembly, like ball bearings. Many B2B products face derived demand. Ball bearings are valuable insomuch as they are used in jet engines, for example.
Under conditions of derived demand, lowering the price will not simply result in higher demand. If there is not demand for jet engines, there will not be demand for ball bearings, no matter how cheap they are. Conversely, if there is demand for jet engines, within certain parameters, there will also be demand for ball bearings. One is necessary for the other.
In many B2B markets, lowering price will only have a weak effect on demand because that demand is derived. Lowering price without budging demand (and budging it sufficiently) is simply leaving money on the table.
Other times, you may simply have a product without a real market. Remember, the customer is king (or queen). You exist to serve them.
If you are a buggy manufacturer, the advent of the mass market automobile leaves you with a product with severely diminished demand. Lowering the price of your buggy to hold onto market share is a losing proposition when the tides of change are against you.
A product does not have to be behind the technological times to suffer from macro trends. The best engineering and marketing cannot make up for customer interest. That is why it is critical to start product design from the point of view of solving a customer need, rather than making an incredible gadget in search of a purpose.
The graveyard of product marketing is filled with wondrous products that could not find a customer.
If you find yourself in this situation, reducing price can help to clear existing inventory but it will not solve the fundamental problem of lacking a product that people want. Better to preserve what profits you can and invest them into developing a product that addresses a customer need.
Is Price the Issue?
Next time you face this situation, try to identify if price is the real hang-up. It is important to take a step back and try to identify if there is a fundamental disconnect between your product and the customer. Knowing when and when not to adjust price for a given customer will save you time, effort, and margin.