Low price is the real technical activity - Huxiu.com#
Omnivore#
Highlights#
Under what circumstances do consumers consider price as the primary or even the only criterion for making purchasing decisions? When consumers are uncertain about the true quality of a product, when the prices of candidate products are not transparent enough, and when consumers are under time pressure, they will rely more on price to assist in making purchasing decisions. ⤴️ ^0b7f8cae
This is particularly applicable to online sales because consumers cannot truly see, touch, or perceive the products, so they cannot determine the authenticity of the products. In such cases, low prices are particularly effective. Another example is during major promotions, where consumers are under time pressure and there are various overlapping discounts and price differences between different platforms, which make product prices opaque and lead consumers to prefer low-priced products.
Companies that truly succeed in adopting a low-price positioning strategy focus on obtaining high sales volume through pricing from the beginning. Expanding sales volume is the most effective way to offset the cost pressure brought by low prices. Therefore, it is entirely possible for a company to achieve sustainable high profits through low-price positioning. ⤴️ ^1e102753
Low prices, large-scale production, and taking profits from the supply chain; this is exactly what Xiaomi does. I have seen an even more extreme example of the most profitable clothing manufacturing company that used to produce for Adidas and Nike, which directly went from the supply chain to end-to-end production, resulting in extremely high profits.
Low price is the real technical activity#
This article discusses the importance of price to consumers and businesses, as well as the reasons and effects of low-price competition. The author points out that low-price wars often have no real winners and can lead to a decline in industry quality and unsustainable demand growth. The article also mentions that the success of low-price positioning depends on the cost advantage of the product and the expansion of sales volume. Finally, the author calls on business operators to differentiate between good and bad market share and improve customer loyalty by managing customer expectations.
• In price wars, there are often no real winners, leading to a decline in industry quality and unsustainable demand growth.
• The success of low-price positioning depends on the cost advantage of the product and the expansion of sales volume.
• Business operators should improve customer loyalty by managing customer expectations.
Prices are everywhere.
As mentioned before, price is an anchoring mechanism, and price is the shadow of value in the minds of consumers. Consumers use price to judge a brand's positioning. Even if this judgment is not completely accurate, it needs to be acknowledged that it has become a habit.
Most people may not have seriously thought about the meaning of price, including business operators.
The power to influence product pricing often lies with business operators or channel controllers. The power of buyers and sellers is not equal, but in the end, buyers will only pay for the value they receive. Sellers need to find this perceived value and price their products and services accordingly. Only when the transaction between the buyer and the seller builds a sense of fairness, will the buyer/consumer remain loyal.
If business operators believe that prices are completely determined by the market and are beyond their control, then they have not yet realized the importance of pricing.
The recent price wars have three main reasons: low-price competition strategies of competitors, increased bargaining power of customers, and improved price transparency.
The last reason is the easiest to understand. The maturity of the industrial manufacturing industry has brought about the transparency of costs throughout the supply chain, thereby increasing price transparency. Products with inflated prices will not sell. The increased bargaining power of customers often occurs when there is a massive presence of homogeneous products, which is beneficial to buyers. As for the low-price competition strategies of competitors, it is more complex and not limited to companies with homogeneous products. For example, the monopoly and vicious competition of retailers can affect brands.
I have also written about "Strong Channels vs. Strong Brands | Reading the News".
Low prices, are consumers really the beneficiaries? Not really, there are often no real winners in price wars.
Logically, when the producer cannot benefit from producing and selling the product, there is no motivation or ability to maintain stable quality. From a macro perspective, it is not conducive to the healthy development of the entire industry. Low prices force companies to cut costs, which makes it impossible to increase the value of upstream raw materials and the supply chain. Over time, there will be a decline in quality. Even if the price reduction within the industry stimulates overall demand, this increase in demand may be borrowing from the future and unsustainable.
In the end, everyone loses.
Actually, low prices themselves are not the original sin.
As Warren Buffett, whom you all like, said, "Pricing power is the golden rule for judging the value of a company." If a startup company wins the market solely because of low prices, I would doubt whether it has truly achieved product-market-price fit, unless it is a disruptive innovation that can significantly reduce costs.
I have written before, many new consumer companies are willing to acquire customers at low or even negative prices, but this can only be temporary. However, business operators always forget that pricing is not about the price, but about customer recognition of the value of the product.
==Under what circumstances do consumers consider price as the primary or even the only criterion for making purchasing decisions? When consumers are uncertain about the true quality of a product, when the prices of candidate products are not transparent enough, and when consumers are under time pressure, they will rely more on price to assist in making purchasing decisions.==
From the perspective of consumers, everyone likes cost-effective products, but I personally do not like/approve of using price as a competitive tool. Once it leaves a mark, in the minds of consumers, low prices will be associated with "inferior" or "cheap" products, and trying to win customers through low prices is a lose-lose situation.
Of course, there may be readers who argue that consumer downgrading is happening, and many brands are starting to adopt low-price strategies.
The problem is that the success of a low-price positioning strategy does not depend on reducing costs, but on finding the most economical solution from the perspective of consumers.
==Companies that truly succeed in adopting a low-price positioning strategy focus on obtaining high sales volume through pricing from the beginning. Expanding sales volume is the most effective way to offset the cost pressure brought by low prices. Therefore, it is entirely possible for a company to achieve sustainable high profits through low-price positioning.==
Low price is the real technical activity. In emerging markets, we can indeed find a "super low-price" market in an almost absolute sense. In May 2020, Premier Li Keqiang mentioned in a press conference that there are 600 million people in China with a monthly income of only 1,000 yuan. It can be imagined that there is a real demand for super low-priced products in the market. That's why Pinduoduo has risen, and that's why we hear platforms repeatedly talking about "sinking markets."
However, success can only be sustainable when the quality of super low-priced products is qualified and stable.
The prices at the end are always different. Discounting and demanding price reductions are difficult to eliminate, and one of the fundamental reasons is that there is enough profit margin for channel merchants, who have the motivation and conditions to exchange low prices for more sales, even if it may not be worth it.
When relying on third-party sales channels, business operators need to face channel pressures.
For some brands with high-end positioning, such as luxury goods companies, price reductions are "poison." With the same level of discount, well-known brands can achieve higher sales in promotional activities, which makes brand owners love and hate it because they have to endure accusations of "not living up to their name" in long-term low-price promotions.
But in the retail industry, there is indeed a high-low price strategy, which is a form of price differentiation based on time. Under this strategy, sellers periodically switch prices between regular prices and promotional prices. During promotional periods, product sales can increase several times compared to regular price periods, which is common.
Correspondingly, there is the strategy of everyday low prices. Yes, the example that comes to mind is likely to be Luckin Coffee - this example illustrates that it is almost impossible to establish a sustainable competitive advantage by lowering prices unless you have an unshakable cost advantage.
Yes, don't get me wrong, Luckin Coffee's main competitor is the Japanese convenience stores that sell coffee, not Starbucks. Targeting Starbucks in their rhetoric is simply because Starbucks, as the market leader, has a halo effect.
Think about it, from the Battle of the Giants between Gome and Suning in the 3C era to the battle between Taotian and Jingdong, the startup companies are challenging the bottom line of low prices with the support of private capital and internet giants, but in the end, it's all in vain.
"Maximizing profits" is a term that consumers don't like but is crucial for businesses because creating sustainable profits is a matter of life and death for companies. Going back to the basics, the only way for a company to achieve long-term profit maximization is to satisfy customers, so supporting blind short-term profit maximization is not feasible.
Recently, there has been a shift in thinking towards managing customer expectations, as business operators should differentiate between good and bad market share.
Good market share is achieved through outstanding performance, quality, innovation, and service, and market leadership is not achieved by lowering prices at all costs. If it is mainly achieved through price reductions and various disguised price reductions without the cost advantage required for a low-price strategy, it can only be said to be bad market share. This is not sustainable and will lead to a decrease in profits and even losses for the company. Once consumers take the promotional prices for granted, the impact of discounts on sales will also be greatly reduced.
Unfortunately, trying to maintain customer loyalty through low prices or discount promotions is the inertia of business operators today.
Perhaps business operators should learn from Uniqlo how to manage customer loyalty by managing customer expectations. Uniqlo does not refrain from promotions, but it only chooses to promote seasonal products that are most likely to attract customer traffic, and these promotions are often limited in time. More importantly, its pricing strategy is consistent across online and offline channels, so customers can enjoy the same optimal price regardless of where they make their purchases.
Although we all know that there are no 100% perfect decisions in business operations, the tension between price and sales volume has always existed. But let us ask ourselves, if an industry cannot escape fierce price competition, it likely means that the products among competitors are highly homogeneous, forcing them to engage in price wars.
At this time, we need to answer this question: Why do consumers buy our products? Is it just because they are cheap? The same question, if there were no low prices, would you still buy things in the top live streaming rooms?
This is what we need to think about: the value provided by the product and the differentiation based on customer value orientation.
At this moment, consumer demand has not weakened but has been "rationalized" due to certain potential risks. Although consumer budgets have decreased, please remember that consumers, like us, have not diminished their desire for beautiful things.
Speaking of which, the "either-or" situation, whether it is the Gome vs. Suning era of the 3C industry or the battle between Taotian and Jingdong, has always existed. On the surface, it is a proactive choice made by business operators for sales volume, but in reality, it still reflects the understanding of brand value and price in various circles.
On January 1, 2019, the "E-commerce Law" was officially implemented. Article 22 of the law stipulates that e-commerce operators shall not abuse their dominant market position by using factors such as technological advantages, user quantity, control over related industries, and dependence of other operators on transactions, to exclude or restrict competition.
Article 35 stipulates that e-commerce platform operators shall not unreasonably restrict or attach unreasonable conditions to transactions, transaction prices, and transactions with other operators on the platform through service agreements, transaction rules, and technology, or charge unreasonable fees to operators on the platform.
Using the "E-commerce Law" to analyze the "JD Procurement and Sales Call to Li Jiaqi" that has become popular on Weibo is as clear as day. However, everyone has become smarter, and contracts may not have explicit constraints, but they may be implicitly agreed upon in actions.
Let me ask, if both JD and Meione require "the lowest price on the entire network," who will bear the cost of price reductions? As the saying goes, you can't get wool from a sheep without shearing it.
People are so much like a flock of sheep.