#entrepreneurship #luxury #premium #value #categories
Today I’ll explain how you can increase your prices while still seeing a rise in demand. This might sound impossible, but it’s all about understanding the relationship between price and value.
Price to Value Discrepancy
To start, let’s look at a graph representing cost, price, and value. The difference between cost and price is profit, while the difference between price and value is goodwill. For example, if a customer buys a t-shirt for $100 but perceives its value as $150, the $50 difference is goodwill. Companies aim to increase this goodwill by ensuring that perceived value exceeds the price paid.
The Impact of Price Increases
When a company raises its prices without adding value, it risks exceeding the perceived value and losing customers. However, in certain product categories, price increases can actually boost demand.
Product Categories
1. Luxury: Brands like Louis Vuitton and Rolex fall into this category. Here, higher prices are perceived as higher value. For instance, a $3,500 Louis Vuitton handbag becomes more desirable if its price rises to $3,900. Luxury brands often manage supply to maintain this perception, limiting availability to create exclusivity.
2. Premium: Brands like BMW are in this category. Price increases must be accompanied by additional value or utility. For example, raising the price of a BMW 3 Series requires adding features like leather seats or upgraded rims to justify the higher cost.
3. Mid-Tier: This category is challenging because many businesses start here. Competing by offering more for less is not a winning strategy. Instead, carving out a niche market and becoming the dominant player in a small pond can lead to success and allow for higher pricing.
4. Low-Cost: Companies like Amazon and Walmart dominate this category. Success here depends on extreme efficiency across the entire value chain, making it difficult for new entrants to compete.
Key Takeaways
• Increasing prices without increasing perceived value is a dead-end strategy.
• Luxury brands can increase prices to boost demand by creating an aura of exclusivity.
• Premium brands need to add utility to justify price hikes.
• Mid-tier brands should focus on niche markets to differentiate themselves.
• Low-cost brands rely on efficiencies to maintain competitiveness.
Understanding these dynamics helps businesses strategically manage pricing and value to enhance demand and profitability.