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An Alternative To Discounts

RTI's CEO John Demskie decided to launch a line of lower-priced home theater remotes for DIY customers and lower-end installers due to declining sales. However, lower-priced products risk cannibalizing high-end sales and damaging a brand's reputation. The article provides four tips for companies to consider when introducing lower-cost items: 1) Simplify products by removing unnecessary features; 2) Make lower-priced products distinct from high-end versions; 3) Sell affordable mini luxuries instead of cheaper versions of existing products; 4) Use a new brand name to separate lower-cost items.

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Francisco Guerrero
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11 views

An Alternative To Discounts

RTI's CEO John Demskie decided to launch a line of lower-priced home theater remotes for DIY customers and lower-end installers due to declining sales. However, lower-priced products risk cannibalizing high-end sales and damaging a brand's reputation. The article provides four tips for companies to consider when introducing lower-cost items: 1) Simplify products by removing unnecessary features; 2) Make lower-priced products distinct from high-end versions; 3) Sell affordable mini luxuries instead of cheaper versions of existing products; 4) Use a new brand name to separate lower-cost items.

Uploaded by

Francisco Guerrero
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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An Alternative to Discounts

Four tips on how to offer low-cost items without cheapening your brand

By Amy Barrett |  Apr 1, 2010

Little Splurge This $38 toy from P'kolino is a lot less pricey than the company's furniture.

Consumers and businesses have tighter budgets these days, and coaxing them to shell
out for high-end products has become a challenge for entrepreneurs. Some, like John
Demskie, CEO of RTI, are going downmarket.

Demskie's company, a Shakopee, Minnesota -- based business with 50 employees, sells


remote controls for about $700 to $900 apiece to companies that install high-end home
theaters. Revenue increased about 50 percent a year during the housing boom, but after
sales fell 15 percent in 2009, Demskie decided to launch a line of moderately priced home
theater remotes for do-it-yourselfers and installers of lower-priced home theater equipment.
"It wasn't much of a decision," he says. "It was a necessity."

But a move like Demskie's is not without risk. For starters, lower-priced products often
come with lower margins. And, if you aren't careful, the cheaper product could cannibalize
sales of your high-end items. Plus, if the low-end product becomes too popular -- or if there
are quality issues with the cheaper product -- you could tarnish your brand. Here are four
smart ways to go downmarket.

Simplify Your Product


There may be costly features that some customers would rather do without. Survey
customers and observe how they use your products. Last year, ClearCount Medical
Solutions, a Pittsburgh-based company, launched a high-tech system that tracks surgical
sponges in operating rooms -- and makes sure the sponges don't wind up inside patients.
After some hospitals said the $17,000 device was too pricey to install in every operating
room, CEO David Palmer decided to develop a stripped-down version.

Palmer invited several hospitals to test the $17,000 system while he and some of his 21
employees observed. After watching more than 100 surgeries, Palmer and his team figured
out that, though some complex procedures required the full system -- which includes a high-
tech trash bin that automatically counts every sponge -- many minor surgeries merely
needed a wand that scanned a patient for sponges.

Since ClearCount began offering a $4,000 scanning wand, the company has landed deals to
outfit four hospitals with 80 devices, a mix of higher- and lower-priced products. "Now we
can custom design a solution for hospitals that is tailored to their needs and budgets,"
Palmer says. He expects sales to reach $4 million this year, up from $1 million in 2009.

Make Distinctions
If cheaper products aren't substantially different from higher-end versions, customers may
stop ponying up for pricey models altogether. The team at PF Digital, a McLean, Virginia --
based company that sells digital picture frames, learned that the hard way.Joe Espejo, PF
Digital's president, says that in 2008, his company rolled out several new digital frames,
including a 7-inch model for $99.99 and an 8-inch one for $170. The two frames had nearly
identical features, except that the higher-priced model, in addition to being slightly larger,
had a sharper picture. Guess which one most shoppers decided to buy? The popularity of the
cheaper frame lowered margins and hurt profits, Espejo says.

Last year, he scrapped both frames and rolled out a high-end, $200 model with a 10-inch
touchscreen and video playback. Espejo says the company plans to launch another cheaper
digital frame, but this time it will be clearly lower end, with some of the better features
stripped out.

Think Small
Instead of creating lower-end versions of an existing product, some companies maintain a
high-end brand image by selling affordable mini luxuries. J.B. Schneiderand Antonio Turco-
Rivas, founders of P'kolino, a maker of children's furniture inDania Beach, Florida, decided
to take that approach in 2008. The company, which sells play tables that can go for as much
as $1,400, rolled out a line of small toys and crafts. Most sell for less than $40. Schneider
says the new products have the same design aesthetic and are made of high-quality
materials that set them apart from mass-market toys. "These are still premium items," he
says, "but they are more consumable products that have broader appeal." The new items
helped P'kolino keep sales steady at $1.5 million last year.

Choose a New Name


When companies decide to create lower-end products, one of the biggest decisions is
whether to create a new brand. Using an existing brand name can help a new product gain
instant identification, but creating a new brand can keep cheap products from tarnishing a
company's image -- or angering its existing customers.

That was Demskie's concern for RTI. He worried that the cheaper remotes would drive away
the high-end home theater installers who currently buy RTI's products. When the company
launches the new remotes in June, they will carry another name: Pro Control.

Though gross margins will be a bit lower, Demskie expects higher volumes, which has
allowed him to negotiate better manufacturing prices. "I suspect this could double the size
of the business," he says.

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