But rather than striving to reinvent and differentiate themselves, some businesses elect to compete on price alone. It’s a strategy almost always guaranteed to fail. Here’s why:
Price will continue to decline. How low is too low? When you slice prices, you also cut into your profit margin, which in turn affects every part of your business. There’s less operating capital for critically important areas like employee payroll, customer service, quality control for your product or service, not to mention opportunities to innovate through research and development.
Technology has lowered barriers of entry. New businesses crop up overnight, thanks largely to the Internet—businesses that pose a direct threat to your own company’s profitability. If you’ve maneuvered your business into the low-cost provider space, some upstart company with less overhead and labor costs can offer a product virtually identical to yours at less expense and quickly undercut you.
It’s very hard to go up again. When you lower prices, it’s extremely difficult to justify raising them up again.
Customers have no loyalty to low-cost providers. Except for vast wholesale enterprises like Walmart, customers generally display no special loyalty to any one low-cost provider. If a competitor comes along and charges less, you won’t likely see these customers again.
Fortunately, competition is possible through other strategies:
Find a profitable niche. What’s different—or potentially different—about your product or service? Are your quality standards among the highest in your industry? Do you offer stellar customer service? What about targeting a specific segment of the market you’ve previously overlooked?
Focus on the customer to the exclusion of everything else. When you compete on price, it usually means you’re paying more attention to what the competition is doing than on the people you want to serve. Reset this focus and ask your valued customers some forward-looking questions. Where do you see your business headed in three to five years? What types of challenges can we help you and your business overcome? The answers they give you should guide your new growth strategies—and help to differentiate you from the pack.
Add to the value of your service or product. Sometimes only a minor adjustment is necessary to noticeably enhance the value of your offering. What add-ons can you provide that strengthen your appeal and improve the all-important perception of customer value? Add-ons that generate clear value enable you to gradually charge higher prices, which helps with capital expenses and gets you out of the compete-at-any-price cellar.