Better Equals Cheaper

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

gk on February 9, 2012 in Entrepreneurship About a 3 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 what sets businesses apart as we used to say in Philosophy class: passion is a necessary but not sufficient condition. Being essential in large part makes passion alone not sufficient_. any business competing for your money is bound to have passionate people behind it. Half-ass 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 point_. 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. Here's how to cut through the clutter: When it comes to business (all business) Better = Cheaper.

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

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

Value and Price are also both loaded terms.

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

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

Price anything and everything the customer gives or gives up by virtue of your product or service:

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

So, you can become cheaper by lowering your direct price, obviously, but also by lowering any and all other price 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 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 branding (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 that is, cost vs value), and warrants its own post (or many, many posts). But a quick and obvious example 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 more than any other 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 cant be quantified. Its 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, etc.). The iPod is actually cheaper although it costs much more. Thanks to human psychology, it can actually feel much, much cheaper. Although the value/price ratios are roughly the same, 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 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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