May 1
Should You Compete on Price?
There are a variety of approaches to pricing your business’ products and services. The approach most small business owners take, however, is offering the lowest price. While Dell and others have built successful companies around this strategy; before you choose to compete on price, understand the way it works.
First, having the lowest price makes it easier to get customers. Price is the most common obstacle to doing business with anyone, and a low, low price often removes that obstacle. This is good.
But second, low pricing thins your margins. Many business owners have no idea what it actually costs to sell something and the percentage of profit they have left to live on. Too small a percentage of profit, and you discount yourself to death. This is bad.
However, if you have discovered an efficiency that none of your competitors has, like Walmart’s approach to supply-chain management or Southwest’s approach to air travel, lower pricing will not affect your margins because these efficiencies are saving you money. This is good.
That is until your competitors duplicate this efficiency. They then offer an even lower price, stealing customers away from you because price—not loyalty—was their only buying motive. This is bad.
Do you see how a pricing strategy that seemed safe at first is now a potential liability?
If you decide to travel down the low price road, and, again, many people have built successful businesses on that road, don’t do it by default. Think everything through, both the short term and long term impact, and make sure you own your efficiency.
Only then can you compete on price.
