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A temptation
for many new businesses is to grab market share by underpricing
the competition.
After
all, it just seems reasonable that if you can offer equivalent
– or even better -- performance for the same price, customers
will flock to you.
Bad idea.
That´s
not to say that how you price your products doesn´t
matter. In most cases, you need to be in the competitive zone.
But that
doesn´t mean that you should try to differentiate your
business by undercutting your competitors´ prices.
Here are
six specific reasons why not.
1. You
will make less money for the same amount of work. Seems obvious,
but it´s easy to forget when the sales register starts
ringing. The idea, after all, is to make profits, not sales,
and you have to make a lot of low margin sales to make real
profits. You also have to work very hard to deliver the goods
on all those sales.
2. You
will attract the wrong kind of customers. The head of the
Louisiana prison system once responded to criticism by observing,
¨What we need to improve our prisons is a better class
of prisoner.¨ That´s a hard goal to achieve if you
are running a jail. It´s an easier goal to achieve if
you are running a business. Customers attracted by low prices
are less profitable, less loyal, and less appreciative.
3. Your
unique selling proposition is subject to being taken away
from you. Once upon a time, K-Mart owned the market for deep
discount retailers. Now K-Mart is in bankruptcy. Why? One
word – Walmart. Walmart beat K-Mart on their key selling
proposition,
low prices. If it can happen to K-Mart (which, after all benefited
from the kind of discounts you get when you buy products by
the trainload), it´s a lot more likely to happen to
you. A unique selling proposition based on your unique attributes
is much less likely to be stolen by a competitor than one
based solely on price.
4. You
will have a hard time building a loyal customer base. In the
long run, businesses succeed to the extent they have loyal
customers. It´s very hard to build a loyal customer
base if you compete mainly on price. Customers who respond
to low prices tend to be focused on one thing – price.
They will leave you in a minute to save a penny down the street.
Even worse, your low margins will make it very hard for you
to afford the kind of killer customer service that develops
loyal customers.
5. Even
when you are the low cost vendor, potential customers may
not believe it based on your small business footprint. Even
if you eliminate many costs by virtue of a lean structure,
people still tend to believe in quantity discounts. As a rule,
they believe that the big operations can acquire things more
cheaply, and so can charge lower prices. They tend to associate
smaller operations with more personal touch and higher quality.
Why fight preconceived conceptions? Position your small business
in a way that fits what your customer wants to believe.
6. It
positions you as a lower quality alternative. People really
tend to believe that you get what you pay for. If you position
yourself as worth dealing with mainly because you are cheaper,
you also send a signal that you are a lower quality option
that is worth less.
Here´s
the takeaway point. Don´t yield too quickly to the temptation
to compete first and foremost on price. Spend some time –
a lot of time – thinking about what other unique benefits
you, and you alone, can offer. If you build your competitive
strategy on those unique attributes, you will be establishing
a better foundation for your business.
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