The other day I was out for a group bike ride and noticed one of my friends had recently bought a new Seven.
For bike aficionados, Seven Cycles is the Rolls Royce of two-wheelers. They are custom-made to the rider's body dimensions and manufactured to the customer's specifications using either titanium or carbon fibre.
My friend had paid more than $10,000 for the bike.
Arguably, the price you charge for your product or service says more about your offering than just about any other marketing message you send.
Here are five reasons to consider being the premium-priced player in your category:
1. Price as a shortcut to quality
For some well-heeled people, price acts as a shortcut to researching a key decision. Instead of doing their homework to identify the best value offering, they simply assume the highest- quality product is the most expensive one.
I asked my cycling friend about how he came to buy a Seven bike, and it turns out that he used price as a decision-making shortcut. He is a successful Internet entrepreneur and didn't have the time nor the inclination to research the best-value bike.
Instead, he went into his local bike shop and said, "What's the most expensive bike you sell?"
2. The "get out of jail free" card
In a business-to-business transaction, managers often make vendor decisions based on which company is least likely to get them fired if something goes wrong.
Chief technology officers outsource their network management to International Business Machines Corp. at least in part because their chief executive officer can't question their choice of going with the market leader. CEOs know they won't be second-guessed by their board for hiring McKinsey & Co. because that company has the reputation of being the best strategy consultants money can buy. Product managers often hire the design gurus at IDEO because it gives them air cover for their project if it goes wrong – at least they can argue that they hired the best designers available.
3. The status seeker
People who buy Louis Vuitton luggage want everyone at the airport to think they are rich. If Louis Vuitton was only slightly more expensive than its competitors, it would undermine its market position. People buy Louis Vuitton because it is expensive, not in spite of it.
Not only will a status brand elevate your profit margin, it also can make your business valuable if you ever want to sell. For the sixth consecutive year, Louis Vuitton, valued at $24.3- billion, was chosen as one of the ten most powerful brands by Millward Brown Optimor's 2011 BrandZ study.
4. A gift says a lot about the giver
Friends of ours recently stayed at our home for a week with their two children. As anyone with young kids knows, two families under one roof can be close quarters even for the best of friends. In an effort to show how much they appreciated our hospitality, they bought my wife and I a bottle of Krug champagne. The truth is that we don't drink much champagne, and the quality is definitely lost on us, but that's not the point. Our friends wanted to say thank you and they knew Krug would communicate their gratitude.
5. The halo effect
Sometimes having one very high-end offering can act as a halo around everything you sell. When Volkswagen AG launched the Phaeton luxury sedan in 2002, it wanted the $100,000 car to be a success. But it also wanted to elevate the perception of the Volkswagen brand so it could sell more Beatles and Golfs, which were becoming dangerously close to the price of entry-level BMWs.
Sometimes having an ultra-premium-priced outlier can make your more moderately priced offerings look like good value.
Special to The Globe and Mail
John Warrillow is a writer, speaker and angel investor in a number of start-up companies. You can download a free chapter of his new book, Built to Sell: Creating a Business That Can Thrive Without You.
Join The Globe's Small Business LinkedIn group to network with other entrepreneurs and to discuss topical issues: http://linkd.in/jWWdzT