Paslode are the market leader for nail guns in the UK.
We’re in a fictional world where we set-up a competitor company and create a new type of gun that works from solar energy. You don’t need to worry about finding a source of electricity to use the gun. You don’t have to change the battery, so you never have the problem of running out of charge.
The product solves a problem that my target customer has and it’s ready to hit the market. How much will we charge for the new gun?
A brand new Paslode gun sells for around £500, so we can decide to go above the Paslode or below, depending on brand positioning. But, that only deals with price, not ‘cost’, and there’s a difference.
When the customer considers our new product, they’re not just weighing up the pros and cons of both products, they’re weighing up the ‘cost’ of switching too.
They’ve been using a Paslode for years. They know how it works and feels and so does the rest of their gang. They’ve invested in the Paslode. They trust the gun and brand, they own batteries, chargers and other Paslode accessories. The new gun works differently. Yes they don’t have to charge it with electricity, but they do need to develop a habit of leaving it in sunlight when they’re not working with the gun so it builds up charge through solar energy. It’s inevitable they’ll forget to do that regularly when first using the tool. That dead time will cost them money, so they need to factor it in to the cost of switching gun.
Customers also consider the non-commercial risks. Their team likes and trusts the Paslode. If the decision-maker switches brand to a new solar energy gun and the results aren’t as good as hoped, it looks bad on that person and their judgment. Nobody likes making bad decisions, especially when they’re out in the open for everyone to see. It’s much safer sticking with what you know.
In the long term, the new product is a better option, but the short-term cost of switching is higher and the cost of the switch doesn’t purely equate to the purchase price of the tool.
When you consider pricing for new work and clients, this cost of switching brands is often something that get’s forgotten. We focus our attention on the price of our product or service, but what really matters is the cost to the client.
If your tendering for a new client, you’re in a similar situation as our fictional nail gun compared to the Paslode. The client doesn’t solely take into account the price of your tender, but the overall cost and risk of your tender.
You’re an unknown quantity, and you’re up against a subcontractor that they’ve worked with before. Even if they’ve had problems with their existing subcontractor and they’re open to trying someone new, your company has additional ‘costs’ beyond the price of the tender. They don’t know what your paperwork is like. They don’t know how you manage obstacles and challenges on site. They don’t know how quick you respond to urgent issues.
When you weigh up all these factors, it’s clear that the cost of switching supplier doesn’t line up with the initial price of switching supplier. With the nail gun example for our fictional brand, a viable marketing strategy would be to sell the gun at a small profit in order to reduce the total cost of the switch in brand and tool. Profits will be made on the repeat purchase of accessories and the nails themselves, as well as future sales of upgrade guns and related products.
Subcontractors could use a similar tactic. In order to reduce the overall cost experienced by a client switching the package from one subcontractor to a new, you could reduce your margin on the first project to win the initial job and prove that you’re an upgrade on their current supply chain.
Then, with the second project, you represent significantly lower ‘cost’ to the client and you can increase your margin as the client doesn’t want to go back to the inferior subcontractor.
Pricing is an important marketing tool, but always keep ‘cost’ in mind when approaching new clients.
Image provided by Barone Firenze / Shutterstock