The High Cost of Low Prices
Why Lower Prices Aren't Always the Answer for Business Success
Many people instinctively think that having a low price makes a product more appealing, especially because we, as individuals, tend to scrutinize even small price differences, like pennies at the grocery store. We often assume this translates to all other products, but it doesn't always work that way, especially in the context of online sales where credit cards are used. Making a purchase online isn't effortless—customers have to find their credit cards, enter their information, and potentially need to go through verification steps, which adds a degree of friction.
The decision to buy often involves more than just finding the lowest price, particularly when the value, reliability, necessity, and trust in a product are also key considerations. The idea seems logical: keep prices low, and customers will come. But this strategy, especially in the context of online products or services, often backfires. In reality, what businesses need isn’t just affordability, but a system for growth.
A strikingly repetitive observation is that most of these low-priced products rarely see sustainable growth because the price is too low to adequately sustain the product's development and outreach. The product isn't making enough to substantiate its value—whether that’s funding customer acquisition efforts or supporting ongoing development. Selling yourself too short, especially in niche products with a finite number of potential customers, means there simply won't be enough revenue to support the business. With some basic calculations, it's easy to see that without sufficient pricing, scaling becomes impossible. A product that doesn't scale cannot sustain growth, and underpricing from the beginning can significantly impede a business's potential for long-term success.
The concept of a race to the bottom perfectly encapsulates the pitfalls of an ultra-low pricing strategy. In a desperate attempt to undercut competitors, many companies fall into this cycle—constantly lowering prices until there is virtually no margin left to sustain operations. This approach can be disastrous, particularly for smaller companies or startups that don’t have the resources to absorb continual losses. In the end, the businesses that win this race are often the ones with the deepest pockets, not necessarily the best products or services.
The Myth of the Low Price Appeal
For many customers, the difference between $1 and $10 per month is negligible. Businesses generally have the budget to afford tools and products that offer real advantages. Even if it's a minimal budget there is still generally a threshold where a small difference in a low price is not going to be a factor in the decision making process. What matters most isn’t whether a tool costs $1 or $5—it’s whether the tool helps them make better decisions, saves time, or provides a genuine competitive edge. Low pricing, in this sense, doesn't necessarily remove decision-making friction. In fact, pricing too low may instead devalue the product in the eyes of a potential customer, leading them to question the legitimacy and effectiveness of the service being offered. When customers feel a product is underpriced, they may wonder if it's reliable or effective enough for their business needs.
It’s crucial to understand that business customers are not like individual consumers, there are some subtel and not so subtel differences. B2B customers aren’t swayed simply by a price tag that’s a few dollars cheaper. The decision-making process for B2B purchases revolves around factors like support quality, reliability, potential return on investment, and the value of insights or automation a tool can provide. Even for consumers a low price might not always help a product garner interest, but it’s especially unlikely to be the core reason why a B2B solution is adopted. Setting a price appropriately not only impacts the perceived value but also directly influences profitability, scalability, and the ability to sustain growth. This underscores the importance of aligning price with the broader strategic goals of a business, rather than merely competing on cost alone.
Costs Behind Products
To understand why ultra-low pricing is unsustainable, we must consider the actual costs associated with developing and maintaining a product beyond direct operating costs like paying for servers. Pricing an offering should not only aim at user attraction but should also cover the multitude of costs that go into running the business sustainably.
These costs include:
- Customer Acquisition Cost (CAC): Acquiring customers comes with expenses that extend beyond online ads and marketing. It could involve sales teams, promotional events, SEO and UX experts, and often free trials or freemium versions that serve as an entry point to lure customers in. CAC should be balanced against the Lifetime Value (LTV) of a customer to ensure that growth is sustainable. The importance of CAC is critical in determining business viability. When comparing CAC to Customer Lifetime Value (CLV), it becomes clear that CAC must remain below CLV to ensure a sustainable path forward. Factors like the length of the sales cycle, market competition, and the complexity of the product also significantly influence CAC, making it a dynamic metric that businesses need to constantly monitor and adjust for growth. If CAC exceeds CLV, profitability is in jeopardy, and this is where effective resource allocation becomes critical for long-term success.
- Maintenance and Product Development: Products need ongoing updates, improvements, and feature enhancements to stay competitive. Maintenance can include fixing bugs that are found by users, which ensures that the product remains functional and user-friendly. It also involves implementing software updates to keep systems secure, which is critical for maintaining trust and data integrity. As user bases grow, optimizations may be required to address bottlenecks due to increased database activity or simply due to a higher volume of users. Additionally, maintenance can include applying security patches recommended by auditors, or refactoring existing code to improve performance and reduce technical debt. Servers, cloud hosting, and monitoring services like AWS, DigitalOcean, or Cloudflare come at a recurring cost. Maintenance isn't just a one-time expense—it’s a continuous investment to ensure product reliability and competitiveness.
- Customer Support and Success: High-quality customer support is essential for a good customer experience, especially in the B2B space. This means employing trained support staff, providing helpdesk tools, and managing comprehensive knowledge bases to empower users. Support may also include making alterations to features and adding new, highly specific, targeted features for customers based on requests, which is extremely costly and potentially time-consuming. Support quality can be a major differentiator in the B2B arena and requires sustained investment.
- Documentation and User Resources: Proper documentation is a core part of onboarding and product adoption. Developing tutorials, guides, and knowledge bases takes time and resources. These materials reduce customer churn and increase engagement by helping customers get the most out of the product. Resources also need to be continuously updated as the product evolves, adding an overhead to most features added or changes made. Marketing material, documentation, and website information all need to be updated whenever a feature is altered or added, which contributes additional time and costs to ongoing product development.
- Brand Development and Marketing Content: From design to creating consistent marketing material (blogs, videos, ads), branding and marketing require consistent investment. Brand perception is critical, where companies want to work with partners they perceive as reliable and established.
- Legal, Compliance, and Security Costs: Compliance with regulations like GDPR or CCPA requires both time and money. Security protocols, audits, and privacy measures are a must for customers, who need assurance that their data is protected. Ensuring compliance and implementing security measures has a significant impact on operational expenses.
- Third-Party Tools and Integrations: Products often rely on third-party services and integrations, such as payment gateways like Stripe or PayPal, analytics tools, and APIs from other platforms. Payment gateways sometimes require essential migrations to adapt to new standards or comply with regulatory changes. Additionally, there are many cases where payment gateways need to be customized to handle various types of scenarios, which can be highly time-consuming and often requires trial and error. These partnerships bring licensing fees that need to be covered, and the continuous effort involved in maintaining, migrating, and customizing these tools adds to the overall operational costs.
- Employee Training and Internal Tools: Ensuring that employees, from developers to customer support, are well-trained on new technologies is another recurring cost. Being well-structured and organized also comes with a continuous upfront cost, as it can be quite time-consuming to manage all the tickets, associate those tickets with actual initiatives, and keep all company plans and white papers organized in a way that is beneficial to the product. Some small startups may not do all these things, but for a product that aims for continuous growth over years, properly organized information is crucial for sustaining growth. Internal tools for communication and collaboration, such as Slack, Trello, or Jira, also represent part of the ongoing budget.
Low Price vs. Perceived Value
Perceived value is critical, especially in the B2B world. Pricing a product too low can often lead to unintended consequences where customers believe it lacks depth or sophistication. This can be especially damaging in the B2B market, where reliability, support, and value-added features are more important than shaving a few dollars off the price. B2B buyers want to ensure they are investing in a tool that is robust and will scale with their needs—a price tag that’s too low can imply that the product isn't robust enough to support professional needs or lacks critical features.
For product providers, a better strategy often involves focusing on value-based pricing or offering tiered pricing models that allow customers to pay for the features they need. Tiered pricing works well because it ensures small businesses and larger enterprises both have options that suit their needs. Meanwhile, value-based pricing aligns the cost of the product with the benefits it provides, which can be compelling for customers who are concerned with return on investment.
It's Not About Cheap; It's About Resonance
The notion that lower prices automatically translate to greater adoption is a simplistic approach that often does not apply to most business products, especially in the B2B space. For companies, the goal should be to find pricing that resonates with the perceived value of the product, supports long-term sustainability, and covers all associated costs—from customer acquisition to maintenance and support. A low-cost strategy might attract early users, but for genuine, sustained growth, the focus needs to be on delivering value, building trust, and ensuring the product justifies the investment businesses are making.