It’s difficult for businesses to avoid becoming a commodity where there’s little to no difference between what they sell and what their competitors sell. But rather than working harder to differentiate themselves, some businesses opt to compete on price alone. And you should know right now that lowering prices in an attempt to gain profit is a recipe for disaster.
Why You Can’t Compete on Price Alone
You’re chasing an ever-declining price.
How low is too low? When you cut prices, you also cut into your profit margin, which in turn affects virtually every part of your business model. You end up having less operating capital for areas like customer service, employee payroll, quality control for your product or service and opportunities, through R&D, for future profits.
Technology has lowered the barriers of entry.
With advances in technology (particularly online), new businesses crop up almost overnight – businesses that can directly threaten your organization’s profitability. If you’re caught in the space of being a low-cost provider, a new company with less overhead and labor costs can produce a virtually similar product at less expense and quickly undercut you. Before you know it, you’re chasing the lowest price and getting nothing for all your efforts.
Customers aren’t loyal to low-cost providers.
With the exception of massive wholesale enterprises like Wal-Mart, customers feel no loyalty to a low-cost provider when circumstances change. Price-conscious customers are primarily concerned with how much they’ll save, so they will not remain loyal to your brand if a better deal is elsewhere. A regular customer is not the same as a loyal customer. If your competitor charges less, that’s the last you’ll likely see of them, so building customer loyalty is more complicated than the cost of goods or services.
Successful Ways to Compete Without Lowering Price
Become a niche player. Think about what’s different about your product or service. Does your customer service outshine all the others? Are you targeting a specific segment of the market? If you haven’t done so already, it’s time to look closely at just what it is that sets you apart – and build on that difference with all the focus and energy you have.
Be customer-driven. Competing on price alone generally means you’re more attuned to the competition than to the people you’ve set out to serve. Reset your focus on customers and start asking them forward-looking questions, like Where do you see your business going in the next three to five years? and What kind of challenges do you face that I can help you and your business overcome? The answers you get – and the way you alter your strategy to help your customers – will quickly differentiate you from the pack.
Always be innovating. Look for new ways to improve the quality of your product or service. Better yet, start looking for new markets and new customers. Remember, if the public thinks you’ve built a better mousetrap, they’re willing to pay more for it. Just think of MP3 players. There’s the iPod and then there’s everything else. Customers will pay a premium price for Apple products because of their design, ease of use and “cool” factor.
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