How to Create a Price Driven Business

You may create a price-driven business because you have found a market opportunity or you have the business model to support it. It is especially opportunistic if competitors are not price-driven and your market is maturing (in other words, customers are better educated about the products and they are either aware that there are choices or they think the products are becoming more like commodities).

To promote a price-driven business, advertise price driven messages.
These could be in the form of banners or point of sale posters, online price comparison stores, direct marketing or catalogues.

When it comes to price-driven businesses, they typically fall under one of the following four categories:
 

Model One: The Internet as a Distribution Channel

The Internet has largely replaced the direct marketing catalogue business which set out to achieve the same result (except that the Internet is even more efficient).

The fundamental premise of the Internet as a distribution channel is that it offers some great advantages in terms of reach and cost efficiency.
These include:

  • Global reach (so a potentially massive buying public)
  • Cost effective set-up (relative to a bricks-and-mortar store, it costs a lot less to set up either your own website or use someone else’s such as eBay)
  • Easy to get involved in price comparison
  • Can offer some flexibility in terms of work and family commitments

 
THE RISKS INVOLVED:

  • Global competitors may be able to source product more cheaply than you and since pricing is very transparent online you may be priced out of the market
  • Exchange rates may or may not be favourable to an international buyer thus potentially limiting your market
  • If setting up your own website, you need to be the first brand people think of in terms of a destination (which is very difficult to achieve). This really pushes the entrepreneur into a niche environment.

 

Model Two – The No-Frills Approach

For the no-frills approach. To work, the business must:

  • Build a no-frills brand. (Brand rules and how-to tips are found under Brand Strategy.)
  • Cut costs in the places that either the customer doesn’t see or doesn’t care about. For example, in airlines, this may mean the removal of perks such as free food or drinks. In supermarkets, its private label products instead of branded products that offer lower margins. Supermarkets also require some self-service on the part of the customer.

 
Examples of no-frills businesses include Aldi supermarkets, no-frills airlines and supermarket private label grocery goods (which are typically priced at about 15 percent below branded equivalents).
 

Model Three – Specialist Retail Model

The specialist retail model began in the United States with Toys ‘R’ Us and has spread globally since. This model is now followed by retailers in many product categories. The fundamental premise of the specialist retail model is:
 

  • Choose a single product category.
  • Stock narrowly (only that product category) but deeply (a bigger range than anyone else).
  • Buy products cheaply and on sell them cheaply.
  • Build the biggest specialist brand in the product category.

 
To work, you need to be the first in your product category. If you are not the first, find a product category where you can be first.
 

Model Four – Strip Out Cost to Sell at Lowest Cost

The story of Dell Computers move from a struggling send-tier PC manufacturer to one of the biggest in the world is inspirational. Its formula is very simple; it has changed to a non-standard industry process to gain substantial operating cost savings which it has been able to pass directly onto its customers.

Dell pioneered the direct sell model (which, incidentally, is helped enormously by the Internet). Under its model, instead of selling through retailers, it removed the middle man and sold directly to end customers. The estimated saving of this is between 3-5 percent.

Dell also abandoned stocking inventory. It adopted a model whereby a customer ordered and paid for a computer. After this is received, Dell builds a computer to specification.

This business model brings four benefits to Dell:

  • It doesn’t stock much inventory so doesn’t need to absorb the large warehousing costs of its computer rivals. Inventory is ordered as its customers orders require it
  • The customer order pays for the inventory (so Dell avoids incurring financing costs because it doesn’t need to borrow to cover the cost of the inventory)
  • Dell can buy parts at the latest prices and pass the savings straight on to the end customer. This is extremely advantageous because computer parts keep reducing rapidly in price and;
  • The model allows Dell to upgrade its computer range faster. As new technology is developed, Dell is in the position to immediately incorporate it into its computers. It doesn’t face the same obsolescence risk as its competitors.

 
While Dell doesn’t spend much on research and development, its walls are covered with patent certificates (most of which are for manufacturing processes reflecting the organisation’s priority: to be extremely efficient and making and delivering computers.)

More about Dell here Harvard Business School
 
READ: More about strategy and the Low Cost Leader. Also this Toy’s R Us Case Study.
 

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