There are two strategies to apply when setting your prices: Price skimming vs. Price Penetration

Price penetration is when you charge a low price, in the beginning, to derive maximum sales volume from the price-sensitive customers.

Price skimming is when you set high price to attract buyers with a strong desire for the product and then gradually reduce the price to attract the next and subsequent layers of the market.

When you adopt price skimming, you are likely to have fewer clients [less volumes], but that’s okay because your high prices will compensate for less transactions.

Ship manufacturers will be happy if they sell about 1 or 2 ships per year because ships are high margins low volumes products.

When you adopt a price penetration strategy, you are in the volumes game.

Since you are charging low prices which will result in low margins, you will have to push more volumes so that you can make decent sales amounts.

The biggest mistake I see entrepreneurs and I have made before is to use low prices as a competitive advantage.

When I charge a car wash at R40, my competitor next door can easily charge R35 because he wants to compete.

Next week, a new competitor comes along and because he wants to compete with us, he charges R30 because to get clients…. and so on and so forth….

Then it becomes a race to the bottom.

Someone else is always willing to go a rand lower than you are in order to compete.

The problem with the race to the bottom is that you might win [and be bankrupt]. 

Every great brand [even those with low prices] is known for something other than how cheap they are.

In the long run, to be the cheapest is a refuge for people who do not have the flair to design something worth paying for, and who do not have the guts to point to their product or their service and say:

“This is not the cheapest, but it is worth it.”

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