Welcome to the latest edition of our brand new weekly series, Break the Rules. Each week our plan is to highlight something you will have heard from some marketing expert as a best practice to be disobeyed at your peril. And we’ll tell you why it’s a rule you should break.
Last week’s rule was Do Anything for the Sale.
This week’s rule = Charge Enough to Cover Your Costs
Don’t lose money on your sales. Seems like a very basic, very logical point of fact about running a business. If you spend more than you make, you won’t be in business very long, right?
Not all the time. Because if you can afford it, there are two circumstances where it might make sense to lose money on purpose.
The first situation is when you can potentially make more money from those customers later. Think of the freemium model or the razorblade model.
The freemium model is commonly used by app developers or websites that offer a free version to get as many people through the door as possible, and then charge them for add-ons or upgrades once they’re already using your service. Sure, it costs you money to sign up the free users, but you know you can make that money back later when some of them start buying things.
The razorblade model is similar in that you lose money on the initial sale, but make all your profits later when those same customers buy additional products. It gets its name from razors and razorblades. It costs more to produce a razor than companies charge. But the margins on the blades are so good that it’s worth it.
The second situation is when you can use a lower price to ward off your competition. This is a bit of a risky proposition, but if you’re trying to fend off competition, block someone from entering your market, or steal market share, it has potential.
If you can afford to lose money on new business, and if doing so will bring in more customers than you would have otherwise had, and if those customers plan to purchase again from you down the road, this strategy can help you grow. It will cost money upfront, but the payoff should be worth it.
Think about how you can price so low that cost is not an issue for your customers, then do it.
Have a “rule” you think we should write about? Share it with us in the comments below or post it to Twitter @zheller using #marketingrules