starting out a new business by offering lower prices

[Spider]

I do not accept that initial low pricing with cause initial customers to become upset when prices are raised. They might not accept your raised prices but that means they will get what you sell from someone else or go without. Or come back to you when they find no-one who is cheaper, or no-one with as good service as you provide.

People aren't all or nothing. The point of low initial pricing is to get a start in the marketplace. Low prices will get the keen shoppers. They won't bring other companys' loyal customers, but neither will high prices. You have to start somewhere. Sure, you can start with high prices, but that is a more difficult start than starting with low prices.

When you start a business, the first thing you need is a few sales. You need those initial sales to; a) give you confidence that you have a product or service that people want, b) test and allow adjustment of your procedures; c) let the market know you exist. The faster you can accomplish those few things, the better it is for you. Even if initial sales result in a loss.

Once you have a few sales under your belt and your busiess is actually operating, then is the time to adjust your prices to whatever level you choose. But to start you have to get started!

[vangogh]

I don't think the issue is really about angering people when you raise prices. I think it's more that by having low prices it becomes part of your brand. You attract customers looking for a lower price who also recommend more customers because you have a price that's low. It sets who you are as a business. Your selling point as a business becomes low prices.

If you later raise prices so you're now more expensive in comparison to your competition you've changed your brand and run the risk of your customers leaving to a competitor who charges less like you used. You attracted people in large part because of your pricing. Change your pricing and you've removed the reason people chose to buy from you.

And by changing prices I don't mean you can't raise something the price of something from $1 to $1.10. People understand prices will sometimes go up. It's about changing your prices in relation to your competition. You can't go from having the lowest price in your industry to having the highest price or even a price consistent with the average without churn in your customers. That's not necessarily a bad thing as your brand will also attract new customers, but you have to expect to lose a significant portion of your existing customer base.

[Spider]

When looking at this in terms of brand, I think one must be careful not to attribute too much to branding. Sure brand is important but it is not created this quickly. It takes a long time to be branded as the low cost resource. Wal-Mart has been around for nearly 50 years, remember.

Also, remember, your brand is what people determine, not what you determine. You can act in a certain way in the expectation that people will respond as you wish but, ultimately, it is your customers that determine your brand. So, a year of exceptional service and low prices could just as eaily brand you as a great service provider as the low price provider. Changing pricing policy is a decision that may or may not affect your brand - if it does, then change your brand strategy. Brand is not locked in forever - and after only a year, your brand is hardly well enough established that a brand change would be difficult.

[vangogh]

I completely disagree. I think brand is the most important part of any company. You have a brand from the moment you open your business. Walmart had a brand of being a low cost resource the moment the first few people shopped there and saw low prices. What takes a long time to grow as a brand is the reach of your brand. When Walmart first opened in Arkansas(?) people in New York didn't know about it. It's brand hadn't reached the people in New York. So Walmart didn't have a brand in New York. It probably didn't reach across the entire state of Arkansas either. So it had no brand for the people who couldn't shop there anyway.

However for the people living and shopping near the first store Walmart most definitely did have a brand and that brand is what attracted those early customers to the store.

I understand that brand is what people determine, which is my whole argument here. If you start out being the low price option what do you think people are going to think about you and tell their friends about? They're going to think low prices when they think of you. If at a later time you raise prices so you're now in the same range as your competition then what people think about you and what you actually are is no longer the same. People walk into your store looking for low prices, discover you don't have low prices, and switch to the store that now has the lowest prices.

None of that means your store can't do well. It does mean that you're going to lose the customers who shop in your store for low prices. You'll have to work to attract a different group of customers, which in some ways will be like starting over. It won't be as hard as if you've grown to the size of Walmart today, but you're still going to have to rebrand your business with all the people who know about you.

[Spider]

I can only agree with you as long as the only thing the business has going for it is low prices. And that would be rather unusual - every business has more than one attribute. If - as you agree - a brand is determined by the customers, low prices in a low priced store may or may not form the brand. Let's say I sell scuba diving gear in a small seaside community - my prices are the lowest prices in the state, but there are no other scuba shops within 100 miles. I am lower than all my competitors but all my competitors are too far away to be of much consequence. My brand will quickly become "The only scuba diving shop in town" not the "The cheapest scuba diving shop in town." People will tell their friends about me as being the only place to buy scuba gear.

So, later, I raise my prices. That will have no effect on my customers as far as brand is concerned.

Nothing is so simple in business, and everything is attached to everything else. Low prices do not necessarily create a low priced brand. But they will, if you have nothing else going for you.

[vangogh]

That I agree with more. I still have some differences of opinion, but I absolutely agree that business will usually have more than one thing going for them and associated with their brand. I think we could apply the convenience thing to Walmart. There's aren't many places where you can shop for groceries and buy a tv or computer at the same time.

I'm not suggesting that raising prices means all your customers leave. I am suggesting that those customers who are choosing you mostly because of your prices will leave. I'm also suggesting that changing prices does change your brand. It doesn't necessarily change it 180 degrees, but it absolutely changes it.

Walmart is a convenient place to shop for low cost items. If they raise prices it becomes a convenient place to shop for (something other than low cost items). Thats absolutely a change in brand, which I think you'd agree. Some people likely shop at Walmart mainly for the convenience. Those people probably don't switch stores immediately because the prices go up. They might if another stores is just as or nearly as convenient with lower prices, but in general those people are still Walmart customers after the price change. However the majority of people who shop at Walmart mainly because of price are probably leaving.

That's all I'm saying. If you start your business as the low price option and later raise your prices, those people who have been buying from because of those low prices will move on. Like it or not your low prices have become part of your brand. Maybe not your whole brand, but certainly a impactful part of your brand. You run the risk later of losing a significant portion of your customer base if you later raise prices. That's neither good nor bad. It just is. It's possible you'll keep enough customers or acquire enough new ones while you transition to a new brand. And transitioning to a new brand isn't always easy or quick. Your reputation for low prices probably sticks with you longer than you'd like.

[Spider]

My only real problem with your approach, VG, is it tends to discourage a starting business from using low prices to get the ball rolling. I think the absolute most important thing in starting a business is getting started. Those first few sales are terribly important. If one is more likely to get initial sales quickly by standing on one's head in the middle of the nearest intersection, then I'd say, Do it! You can adjust any aspect of your business - prices, opening hours, level of service, location, anything - but you have to get started - you have to make those first sales. And anything you can do to make those first sales quickly is uppermost in my book.

Low pricing is an easy thing to do. Call them Introductory Prices, Incentive for First Time Shoppers (which is everybody at this stage), Grand Opening prices, Look-Out-We've-Arrived-In-The-Area prices... anything but get those people in the store and START! Get the cash register ringing. Adjustments can come any time after you have started.

Pricing yourself high or even mid-range as an introduction is no introduction, at all. Pricing yourself average or above average when people don't know if you are worthy of that pricing, is to delay your start. Start with a bang. Prove you are worthy of high prices before charging high prices.

[billbenson]

Do most business's really end up being successful from where they started? I really doubt most small businesses end up successful at their initial business model. Low pricing gets you out there and doing it, even if you don't make money. Then you can refine your business.

As to price increases, there are plenty of ways to increase prices. Tell your initial customers that your pricing will stay the same for a year (in the case of a plumbing business example) in appreciation of their help getting started. Now they know you. If you did a good job they will probably come back to you. They may even give you more business before that one year period ends.

Not being able to handle a year of no income is why many small businesses either fail or start as hobby businesses. Some fail, some make it. Its a valid method of getting started though.

[vangogh]

Why does a business have to start by pricing low? That's not the only way to get the ball rolling. If anything if could lead to frustration since you work hard for little return early on. I agree it's important to make those first few sales, but by your same logic you might as well price things for free at first since that way you'll make those first few sales quicker.

I'm not saying you can't start with low pricing. I'm simply saying that doing so brands your business in a certain way. I think the brand of a business is the most important thing it has and I think it's important to start thinking about your brand and building from the moment you conceive of the idea to go into business.

[billbenson]

If you are responding to me VG, I'm just saying its one way. Certainly not the only way. You are familiar with what I do. No branding and priced high. Go figure

If I remember correctly I started with list price and kept moving prices up until I hit kind of the top of the bell curve. I'm thinking about upping the price a couple of percent again actually.