Better Equals Cheaper

Cheaper is not simply less expensive. Cheaper means Value divided by Price

gk on February 9, 2012 in Entrepreneurship About a 4 minute read.

Too many budding entrepreneurs confuse passion with differentiation. They think that because they care a lot, they have a competitive edge. I agree wholeheartedly that passion and enthusiasm are essential, but they are not really what sets businesses apart.  As we used to say in Philosophy class: passion is a necessary but not sufficient condition. In fact because it is essential, passion alone can not sufficient. Any business competing for your money is bound to have passionate people behind it. Half-assed, indifferent businesses don't tend to last very long.

More importantly, different obviously doesn't mean better. Every business is competing with every other business in its market and mere differentiation is not a competitive advantage. At the end of the day, every business wants and needs to be better than the competition, not just randomly different.

But this brings up a very important question: How do you really differentiate yourself from the crowd in a way that makes you competitively better? If you think about his from a tactical level, it is very easy to get absolutely swallowed by the millions of factors that seem to be important: product, positioning, marketing, messaging, adoption, outreach, networking, sales, support, branding, etc., etc. etc. But at a strategic level, you can cut through all this clutter: When it comes to business (all business) Better = Cheaper.

Your sole ruthless goal should always simply be to be cheaper than your competition.

Now, this is important, but obviously not superficially true. Let me define a few terms....

First, cheaper does not simply mean "less expensive" or "lower price". Cheaper means Value divided by Cost.

Value and Cost are also both loaded terms.

Value is anything and everything the customer gets out of your product or service:

  • Functionality/Utility
  • Pleasure
  • Satisfaction
  • Peace of Mind
  • Ownership Prestige
  • Brand Value
  • Etc.

Cost  anything and everything the customer gives you or gives up by virtue of acquiring/experiencing your product or service:

  • Initial direct cost to acquire: i.e. "the price"
  • Time to acquire (e.g. shipping, sales cycle)
  • Time to learn (e.g. ease of use)
  • Time to operate or utilize
  • Uncertainty about outcomes
  • Cost to maintain
  • Risk inherent in every transaction
  • Negative associations/stigma
  • Etc.

So, you can become cheaper by lowering your direct price, obviously, but you can also become cheaper by lowering any and all other cost factors (e.g. lower risk-cost by offering money-back guarantees, lower use-cost by providing great simple interface, lower acquisition cost by limiting upfront paperwork, etc., etc.).

You can also become cheaper by adding value. Most people think of this narrowly in terms of providing more and better services, or adding features, or adding more and more functionality to a product. These are valid approaches, but by far the most powerful way to add value and thereby lower price is by investing in Brand (Brand is also the best way to lower cost. For example to mitigate risk cost by having a sterling reputation). 

Brand is therefore super, super, dare I add a 3rd super important. The reason why is simple: leverage. As mentioned, Brand can positively influence both sides of the cost/value equation. Notice that many factors on either side of the equation come at the expense of factors on the other side. A classic example is that most of the things you would do to add value (e.g. adding features, etc.) also tend to drive UP cost (e.g. more features means more complexity & higher use-cost). Brand has the unique ability to both LOWER costs (e.g .remove uncertainty) AND drive UP value (e.g. prestige).

Since Brand has the unique ability to add perceived value and lower perceived costs, it can leverage the cost/value ratio disproportionately. A quick and obvious example of this is the iPod.

On my definition, the iPod is the cheapest portable music product currently on the market. On the price side of the equation, it actually seems non-competitive. It clearly costs much more than any other music player. It does have a better UI and is easier to use and operate than most others, but by now most competitors have incorporated similar UIs and features. Apple doesn't provide dramatically better guarantees or customer service than anyone else, so there doesn't seem to be any obvious price advantage to warrant the dramatic difference in cost.

BUT, on the value side, Apple has absolutely loaded the iPod with brand value that almost can't be quantified. It's as if any other digital music player may sell for $2 and have 4 units of value, but an iPod may sell for $9 and have 20 units of value (because of brand, prestige, reputation, etc.). The iPod is actually cheaper although the price is much more (in this particular thought experiment, more than 4X more!!). Thanks to human psychology (perhaps another post?), it can actually feel much, much cheaper. Although the value/cost ratios are roughly the same (~2:1), to the consumer it feels like they are getting 16 units of value for only an extra $7.

Anyway, I've found the Better = Cheaper lens to be extremely valuable to business owners and managers who are trying to work through these issues for their businesses. The relevant question is certainly not: 'What makes you different from everyone else?' It is not even the correct but vague: "What makes you better than everyone else?". 

You should always, always ask: "What makes you cheaper than everyone else?". Because at the end of the day, that's precisely what the customers are asking.

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