EDITORIAL FEATURE
Avoiding the 3 Types
of Price Advertising
“
By Howard Partridge
O
ne of the worst things you can do
in marketing is advertise price
before value is proven. The most
common type of price advertiser
is the one that advertises a ridiculously
low price but never intends to honor that
price or there is only one in stock at that
price. These price advertisers could also
be categorized as a “bait n’ switch”. They
bait the prospect with a low price to
get them in the door and then once the
prospect is generated, they switch them
to what they really want to sell. In the
worst case, the company would even refuse to offer the low price service which
is totally a deceptive trade practice. Do
you have bait n’ switch operators in your
industry?
The bait n’ switch advertiser is only
one of three types of price advertisers. The second is what I call the value
choice. The value choice, unlike the bait
n’ switch is a legitimate business model
but has intentionally positioned itself as
the lower price alternative. Think of how
Southwest Airlines began in business.
They intentionally positioned themselves as the low price alternative and
they were very focused about running
their business model accordingly. Not
offering meals on their flights, their
point-to-point routes, open seating,
and the revolutionary “10 minute turn
around” policy have helped keep their
costs down so they can offer lower fares
and still make a healthy profit. This model doesn’t work for a small business that
doesn’t have the scope or infrastructure
that a large company has.
This brings me to the third type of price
advertiser. The third type of price adver-
He can’t compete with their
margins. He doesn’t have the
management infrastructure,
the capital, the brand image, and
the television commercials
that the larger company has.
”
tiser is the small business that doesn’t
have the management infrastructure,
the reach, and cannot handle the volume
that a larger company can. Let’s think
about a plumbing company. If a plumber were a smaller operator, why would he
want to match the price of a bigger operation?
He can’t compete with their margins.
He doesn’t have the management infrastructure, the capital, the brand image,
and the television commercials that
the larger company has. His revenue
is generated by his sweat. Therefore,
even though the overhead is lower, this
person should charge more rather than
less. The key is that this plumber must
understand what differentiates him from
the larger firm which we will get to in a
moment.
Let’s look at a comparison between
the smaller operator and the larger
company. For example, let’s say this
is the income statement of the larger
firm:
$5M Income
-$2.5M Cost of Sale
=$2.5 M Gross Profit
-$2.0M Fixed Expense (40%)
=$500k Net Income
24 SMALL BUSINESS TODAY MAGAZINE [ APRIL 2015 ]
If a smaller operator who billed
$200,000 has the same cost structure
that produces a 10 percent margin, he
would end up with $20,000 in profit. Not
cool! And that’s what is happening in
small businesses around the world every
day! Obviously, there are lots of variables
in this scenario but the point is that you
can’t compete with H\