The Problem with Competing On Price
The low price point, the discount, the “save money here”… charging less can be an appealing strategy to win a quick sale or big deal. The problem is that it is a short term fix with no long term tie-in. Below are 4 “Why Not”s and 1 “Okay Maybe” for competing on price.
It Allows For Threats
Every business should perform an effective threats review, either through a SWOT or Five Forces analysis. Basing your strategy on low prices simply lowers the barrier to competition, increasing your threats on the market.
A competitor with less risk aversion or more resources that you have will undercut your prices, essentially obliterating your competitive strategy. Trying to counter-act that with still lower prices initiates a race to the bottom. Not where you want your business to be.
It Lowers Your Margins
You need to be making a profit with each sale, otherwise you do not have a viable business. The more research, service and support you provide, the more that allows you to increase those margins.
Competing on price, on the other hand, means lowering those margins. And continuing to do so as competition becomes more and more tough. The afore-mentioned “race to the bottom” tends to lead to the death of at least one of the competitors, often of both.
It Eliminates Brand Loyalty
When your clients are looking only at the price point, it means they are not connected to you or your brand. Lack of brand loyalty means more than losing the clients to your price competitor:
- Your clients won’t be telling their friends and peers about your brand, eliminating the possibility of world of mouth marketing
- Clients will not interact with your brand in a meaningful way, which means you will struggle to obtain any valuable customer feedback.
- Renewal or re-sale rates increase the value of your business, a lack of brand loyalty will diminish your sale price when you want a buyer or investor for your business
To name but a few.
It Provides Difficult Clients
Clients who shop for the lowest price tend not to stop once the sale has been made. More often than not, these are the clients who will negotiate every request and every re-sale, and of course they are doing so only for the price point.
A business risks spending more time and energy in managing these relationships than the money actually made from each contract.
There are, of course, successful businesses that have been built almost entirely on a price point strategy; the retail giant Walmart comes to mind. And let that be the lesson here: if you can leverage economies of scale and ubiquity of access, then this may be a strategy you consider.
Value, however, will always have a longer life than price.
Have you conducted your competitive analysis yet? How strongly can you define your value proposition? Contact me for a half day session to build a strong Unique Value Proposition together.