From my mail:
One of my sales reps is trying to get me to reduce my wholesale pricing.
I am concerned that the details I have added to the line (engraved buttons, quality fabric, etc.) are being overlooked by the buyers. One feature of the line is “selling itself” according to a different rep but there seems to be a barrier between buyers who want the line but who won’t pay more than the $19.99 mental block price.
I don’t want to sacrifice quality and detail for more sales, however, I also don’t want to shoot myself in the foot by sticking to firmly to my guns.
First, I must commend you for your willingness to be open minded about the problem. This is an intriguing one, it’s a question I’ve gotten many times over the past 10 years. Accordingly, my responses will be based on past experience because I’ve seen the situation from several different sides. By the way, none of my responses should be interpreted as directed at this DE personally (unless directly stated) because I don’t know her beyond this email and I’ve never seen her products. If anything, my response should be interpreted as a generic response to anyone who may be grappling with a similar issue.
I can summarize my responses with:
- There’s a limit to what people will pay for a toaster.
- Comparatively speaking, it’s a fallacy that increased quality requires an increase in costs.
- There is a disconnect between how you and your customers perceive value.
There’s a limit to what people will pay for a toaster.
Back when I started working with DE companies, I ran into this lady named Geraldine. She was a real piece of work and had some emotional baggage. She had this thing about quality and imagined that wealthy (old money) people would pay $300 for play clothes for toddlers. She’d always wanted to be wealthy and had recently gotten lucky enough to marry an attorney (who was not so wealthy by anyone’s estimation other than hers, having come from reduced circumstances) but was trying to jump start her social entry into exclusive circles by making exclusive products -using his money to bankroll her venture of course. She put on a lot of airs. Now, I’ve met truly wealthy people and the most striking thing about them is their humility and noblesse oblige; she obviously had never known truly wealthy people and didn’t know they can be very down to earth and very nice people. Second, there was no way old moneyed people were going to pay $300 for a toddler’s pinafore with lined ruffles on the sleeves. Come on! While there’s always an exception, most rich people got rich because they didn’t blow their money. Anyway, Geraldine is why I say there’s a limit to what people would pay for a toaster and by this I mean that there’s a limit of what the market will bear based on anticipated life span and features of a product. A kid will grow out of anything quickly and while I’m not suggesting parents won’t invest in heirloom quality products for specific events (say a wedding, first communion, portraits, baptism etc), they’re not going to spend that kind of money on rough and tumble play clothes.
Now, I’m not suggesting the DE who emailed the questions to me is arrogant like Geraldine. No way. But, I am asking -any of you- whether the features that one builds into their products are features that the customer will perceive as value. It may be the customer agrees these features have value but that said features in this particular product are something the customer doesn’t care to pay for. Some DEs have the idea that people will pay for quality regardless of the item’s intended lifespan or utility but it’s not true. For example, consider a cap and gown used for a high school graduation. This product is a one shot deal. Nobody is going to pay for a cap and gown that’s been made out of imported silks, has had all of the pleating hand tucked with silk finished seams through out. People assign value to an item in accordance with its anticipated utility and lifespan.
The fallacy that increased quality requires an increase in costs.
This is something that goes right to the heart of lean manufacturing. In our (“western”) culture, there’s always the presumption that increased quality requires increased cost. In an absolute sense, increased quality can mean increased costs but not in a comparative sense. For example, if you look at the example provided by Toyota, it’s been definitively proven that increased quality does not mean a required increase of expenditure. Toyota produced the Lexus to compete with BMW and Mercedes. The Lexus was comparable in quality (if not better) but Lexus were half the price of the BMW/Mercedes. This is what I mean by quality not costing more in a comparative sense. You have to compare apples to apples. Quality costs less, not more. It’s been proven time and time again that producing quality consistently means doing things the right way the first time.
The other problem with this fallacy that I see a lot with DEs is the presumption that the more labor is involved, the higher the quality. Again, you have to look at this in a comparative rather than absolute sense. For example, consider the results of the nameless tutorial series, or even the zipper tutorials. The way I illustrated was a lot less labor and the results were superior. Less is more! Less work doing the same operation means you’re smarter and more streamlined, it does not mean lower quality. And again, consider the comparatives. Sure, silk seams are undoubtedly of higher quality but it’s overkill to put those on a cap and gown that’ll only be worn once.
There is a disconnect between how you and your customers perceive value.
This can be related to product inputs and labor but let’s limit this discussion to inputs which in this case would be the engraved buttons…are these buttons engraved with your logo? If so, is your brand established with perceived cachet in your market? If your brand is not established with perceived cachet, the buyers may resent that the increased costs of those buttons are artificially requiring them to subsidize the establishment of your image in the market. I mean, if you’d previously been producing products at the 19.95 ceiling, they may feel that they are having to pay more now so that you have a buffer to subsidize the establishment of your brand in the market. On the other hand, if your brand was already established with perceived cachet, I could see that the buyers would like the engraved buttons because it’d be a way that your products could be discerned from others in the marketplace at a glance.
The other thing that few of us care to admit to ourselves is that engraved buttons can be overkill. I’m saying this based on a past experience I had with another customer. In that DE’s case, the buttons were superfluous. It was a new product line with a lot of problems (the expensive buttons being just one of many). The buyers saw it as kind of arrogant because if the DE had had both oars in the water with a product that merited the wonderful buttons, it would have been okay. As it was, using the engraved buttons on this DEs products could be compared to using silken cords on the necks of burlap bags; the product didn’t warrant such expensive inputs. Buyers can interpret that as something that you’re doing for yourself but it’s not adding value to the product so they resent having to pay for it. Using custom made buttons do not constitute a value to the customer and so, they’re not willing to pay for it.
Now, I do think there is great value in branding your product line with logos if you can. I’m not saying you shouldn’t but your products have to be comparable to other products in the marketplace, particularly in price. The buttons (or more often zipper pulls) do not create value themselves until your line has established cachet. Therefore, you’re going to have to differentiate yourself in other ways by creating value in ways that your customers agree with.
Another thing. A lot of sales reps have been known to pressure DEs into lowering their prices because it makes the product line easier to move and I can’t know the truth of this situation. In this case, you’ve said your other sales rep says that your products have a feature that sells itself so what’s the truth between the two reps? Still, going back to the first concept I mentioned, it could be that there is a perceived price limit of “toasters” in your market of 19.95.
Also, reps are known to have their own less than ethical reasons which you can’t always know in advance. For example, I knew of one rep who strenuously objected to anything a DE (a client we shared in common) would do that might increase her costs. She objected to an idea I had for an innovative hang tag that would have been appropriate for the product line (the line was called “Garden Kids” and I suggested to the rep that the DE should use seed packets with a custom sticker on them as a hang tag). The sales rep didn’t want me to tell the DE of my hang tag idea saying it’d increase the costs but I found out later that the sales rep went to the DE and made that suggestion herself, taking credit for my idea :)
This DE reports that she has always used engraved buttons from the beginning. Accordingly, I’d recommend that she continue to do so. I feel that doing otherwise would be too risky. We will be looking at her processes to analyze opportunities for cost reduction. I’ll keep you posted as I am able.