There are generally three ways you can position your company – either provide products or services that are better, faster or cheaper.  Normally, you cannot be all three – and you have to choose which is your competitive advantage.  Faster is defined by UPS or Fedex where you can generally get your parcels delivered in a day, or McDonalds where you can go in and be eating your meal in a few minutes.  But for the moment, let us forget about faster, and concentrate on the other two aspects – either you can be better or you have to be cheaper.

Most SMEs or startups would naturally choose cheaper.  When I heard various business plans from my entrepreneurial students, most came up with plans for their business, and when queried how they would sell their products, many choose to undercut their competitors’ prices as a way to gain market entry.

Even my own sales people would normally justify the reason when they would lose deals – they were more expensive, and somebody came in cheaper.  It is as if the new startup entrepreneur or sales person can only sell if they are the lowest priced.

We are indeed entering a new era of commoditization – the internet, as well as advanced information flow means that it is hard for you to sell at a premium because it is so easy to compare prices.  That is, if you are selling the same goods or services as everybody else. Yet, there is a new phenomena in shopping that should catch the entrepreneur’s attention – more and more people are willing to pay a premium for luxury goods that are distinct or unique, and in which they think will have value to them, or makes them feel good.

You will meet people who maybe earning only a monthly salary that is barely minimum, and yet spends half their income on premium cigarettes or StarBucks Coffee.  They may scrimp on meals, but have no problem plunging down half their salary on a Nike shoe or the latest cell phone gadget.  How many people spend money buying Havainas slippers when slippers just as good may cost 5 to 10 times less?

So you see executives spending millions on a BMW or a Volvo car, and yet goes to Makro to buy sugar and groceries so that they can get it a few pesos less.  Or the person who has no problem buying a Rolex watch, but would not buy your canned goods if he could buy it a few pesos cheaper elsewhere.

According to a survey of middle income consumers in the US, over 90% of them say that they are willing to pay a premium for at least one type of product.  These helps defines a market segment that would be called Mass Prestige products, or new Luxury goods – these products or services may possess higher levels of quality, taste and aspiration than other goods but are not so expensive as to be unaffordable.

For instance, look at the number of people who would buy Bench underwear, or an Apple Ipod.  These are products that appeals not only on functionality, convenience, but also on an emotional level – look at the fierce loyalty of Apple users and the zealousness they let people know about it.

According to studies, in order for you to qualify on these products, it must connect with the consumer on three levels.  First, it must have technical differences in design or technology than most products on the same category.  Note that Apple Ipod  does have a unique form design. Second, these differences must contribute to superior function.  Third, the benefits must combine with certain brand values ( note the Apple slogan, “ Be different”) and company ethos to engage the consumer emotionally.  Consider the returns for Apple.  While most manufacturers brands have hardly sold a million units, Apple Ipods have sold over a hundred million units at much higher price and premiums. Apple is trying to duplicate such feat now with the new iPhone, a cell phone that will probably have features that most cell phones already have, but doing so with a much better design, and a better emotional appeal that makes the user feel cool in front of his colleagues.

We are in an increasingly stressful environment, and more and more people are looking to release their tensions by engaging on activities that are meaningful to them to make them feel and look good or at least be a salve for their emotional distress.  Premium services focused on these segments, and the brand that builds on it, will succeed over other commodity goods by selling more unit volumes at even higher profit margins.  Next time you go to a mall, pay attention to the brands that ‘did’ it, and see if you can build your own image or brand that can command a ‘premium’, rather than slugging it out by being cheaper.

I started to write for SME Insights,  a national bi-monthly Small and Medium enterprise magazine last July 2006.  These are the series of articles I wrote for them which I am putting on here.