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What makes your company unique? Why do people buy from you?
In business, you can typically offer two of these three things, if you work hard:
- A high quality product or service.
- An impressive overall shopping experience, with great customer service all around.
- A low price.
However, you can not realistically offer all three of these at the same time. Nor should you try to.
If your goal is to actually build a large, profitable company, competing on price is not only incredibly challenging, but it offers the highest amount of risk for the lowest reward. It is a loser’s game, and by simply adjusting your strategy, you can position yourself to do far better while practically ignoring price completely.
In this article, we’re going to make clear why you should rarely, if ever try to compete on price, and cover actionable strategies to take instead.
Let’s get to it!
1. A Bigger Competitor Will Crush You
First and foremost, any market leadership you’ll be able to attain by lowering your prices, will be incredibly short-lived.
Here’s the reality. You are not Walmart. You are not Amazon. You are likely not a multi-billion dollar corporation with endless profits, that can afford to sell at a loss for months or years to bleed your competitors dry.
However, this is the reality for major retailers around the world.
Regardless of how cheap you price your products, you’ll be in trouble before too long.
- A bigger company can order more from factories, securing a much lower cost per unit.
- A bigger company can invest millions of dollars into marketing their own brand of product.
- A bigger company can run millions of dollars of tests to figure out how to best convert people into buyers, at prices you could only dream of reaching.
It just doesn’t work.
This alone should be reason enough not to compete on price. It’s a strategy that will net you sales in the short-term, but leave you very little profit to work with – and that’s before a mega corporation decides they want those sales for themselves.
2. Low Prices Attract Problem Customers
I once had a customer throw a hysterical fit over 11 cents.
11. Freaking. Cents.
Somehow, the customer was refunded 11 cents less than what they had paid for, and my goodness I had never seen someone so upset.
The truth is, low prices attract the problem customers. The customers who will find anything and everything to complain about, in hopes that you will either…
- Discount the product further, or…
- Accept a return-in-full for their used, broken, or otherwise unsellable purchase that they decided they no longer want.
These customers will intentionally cause problems in hopes of getting partial refunds, cheaper prices, or replaced units.
When it comes to service work, low-price clients are far more likely to…
- Not actually value the work that you’ve done, and expect more from you than is reasonable.
- Ask for more (free) revisions, do-overs, or additions.
- Ask you more questions, and micro-manage you more than is reasonable.
- Delay payment for as long as possible.
In other words, you may well use some of the little money you get from these people to buy yourself some ibuprofen, because headaches are surely in store for you.
As if this weren’t enough, price shoppers are only loyal to one thing – price. If they can get something similar for a cheaper price, you’re out of their minds forever, and you won’t be able to retain them.
3. Large Margins = Large Opportunities
When you have a healthy profit margin on your product or service, you give yourself a lot of opportunities.
Small margins ensure you’re heavily constricted, and always at risk.
You have to hire large amounts of people to ship your products, handle customer service inquiries, and everything else that comes with a large amount of volume.
If sales suddenly drop, you’ll find yourself overstaffed – and you’ll have some tough decisions to make.
On the opposite end, a larger margin not only makes you more per sale, but decreases other operating expenses as well. This gives you more cash to work with, to invest in other areas, such as:
- Making your brand known, through profitable marketing campaigns.
- Investing in completely new products and product lines.
- Improving your product further.
- Training your staff.
- Running experiments, and trying out new things to improve your margins further.
- Building a cushion of cash to sustain yourself and continue growing during economic recessions.
- Making long-term focused decisions that do not need to generate an immediate return.
It’s not impossible to do any of these things with razor-thin margins… but it’s certainly a lot more difficult.
4. It Is Difficult To Increase Prices Later
If your customers become accustomed to certain prices – especially if you are known for your low prices, you’re going to have a hard time increasing them.
As mentioned earlier in this article, price shoppers are only loyal to price. They will shop around, and leave your brand forever once somebody else offers them a few extra cents.
Even with loyal customers, a price increase is akin to a slap in the face, even if it’s justified. People simply don’t feel good about having to pay more for the same type of products that they’re already enjoying.
On the opposite end, running sales is (usually) welcome and appreciated – something for customers to get excited about.
Price increases? Not so much.
5. Low Prices Send Poor Psychological Signals
Businesses are built off of one core concept – buyers give you money, for you to solve one or more of their problems.
When buyers make this transaction, they do so with the belief that your product will adequately solve that problem.
The problem with low prices is that your product may appear as the ‘budget solution’ – something that may or may not actually deliver the results. Buyers may find themselves asking questions such as…
- “Why is this product so cheap? What’s wrong with it?”
- “Did they use cheaper materials to bring down the cost? Will this product last?”
- “What if it doesn’t work, and I have to buy the more expensive option anyway?”
- “What if somebody I know finds out I’m using this cheap brand?”
The fact of the matter is, consumers automatically associate lower price with lower quality, especially if the price seems too good to be true.
6. Competing On Price Isn’t Necessary
It may seem like a low price is necessary to gain any traction, especially if you are a price-based shopper yourself.
However, this is far from the truth.
In reality, people don’t look at price. They look at value.
This is why people are not willing to pay more than a few dollars for a can of soda, but will pay hundreds of thousands of dollars for a house. Obviously, there is a huge difference in value between the two.
Therefore, your job isn’t to offer a cheaper price than your competitors. It is to effectively demonstrate through your product, your packaging, and your marketing why your product is a better value overall.
When you’re able to do this, price immediately becomes irrelevant.
How To Avoid Competing On Price – Here’s What To Do Instead!
Although lowering your price is probably the easiest way to make more revenue (revenue, not profit), positioning your offer a different way isn’t particularly challenging either.
Let’s discuss some strategies to help you position yourself based on value, rather than price.
Identify Your Unique Selling Proposition (USP)
First things first, you need to discover what it is that actually makes your product unique.
Usually, there’s something. For a tangible good, it could be the materials used to construct it, the ease of use, or addressing a common customer complaint in another company’s product. For a service, it could be your 10 years of experience working in this field, your first-hand experience that other people don’t have, or the fact that you’re able to meet with the client at their desired time.
It really can be anything. Think about how people will feel when they use your product, and look for the causes of this. Additionally, look for the negative feelings people feel when utilizing competing products or services, and highlight where your product improves.
Even if your product has nothing unique about it however, don’t worry. Not all hope is lost.
Build A Brand That Invokes Positive Feelings
One of the core principals of branding is to invoke a certain feeling in consumers, both when interacting with the brand, as well as using their products.
Brands do this not only through their design on their packaging and sales pages, but also through the sense of belonging and community they build through their marketing campaigns.
Somebody buying an iPhone rather than a generic smartphone almost feels as if they were in some sort of exclusive club. The same can be said for Harley Davidson motorcycles, or Starbucks coffee.
With these brands, it’s not just a product. It’s a lifestyle.
Build Truly Great Customer Service
Every company says they want to have great customer service – but there is a difference between having a customer service line and actually having exceptional service.
Great customer service starts the moment you make contact with a potential customer – before they have even bought, and well after they’ve given you their last dollar.
Be available for them, understand their problems, and do everything you can to prevent further problems in the first place. In a world where real human connection is slipping further and further away, small acts of kindness and understanding can really go a long way to helping your company become memorable.
People are willing to invest more money in a product if they truly feel like their needs will be taken care of, in the event of any issues.
Remove Risk With A Generous Refund And Return Policy
Larger margins mean you can afford to absorb the cost of refunds and returns. It’s often worth employing a generous refund and returns policy, to reduce the feeling of risk that comes with larger purchases.
While this will certainly be abused by some customers, this will almost always be made up for by both the increased margin and the increased purchase volume.
Try it out!
Although lowering prices to beat your competitors may seem like an easy solution to your sales problems, doing so simply isn’t worth it.
While it may provide a short-term bump in revenue, the long-term implications are too costly, and will only leave your company vulnerable in the future.
Instead, focus on building up the value of your offering, and working to effectively demonstrate that value to potential consumers.
Not only will you be far safer going forward, but you’ll grant yourself opportunities to further improve and grow your company safely, quickly, and profitably!
To your success,
– James McAllister
Review the main points of this article in the SlideShare below. Feel free to embed this on your site, use it in your organization, and share it with others! All I ask is that you give credit! (Download links are available from SlideShare’s website, which you can access by clicking the LinkedIn icon)
This post is another useful piece that would benefit all marketers, including those in the freelancing sector. For example, you rightly stated that making a price increase can be difficult sometimes. I relate to that because, in my line of business, your price goes up as you hone your skills. I have raised my amount over time, and I know the reaction of some of my clients, especially my loyal customers.
Despite that, it is of no use competing with others for a product price. I know so because I have bought some products (digital), some good and some not. So, what one should focus on is providing value. When consumers figure out that you have quality, they will buy from you no matter the price tag. I give an example; I recently bought a digital product for $397 and within one week, I started seeing results. However, I bought a similar product some time ago but could not make anything out of it, even though it was cheaper.
Therefore, the idea is to offer your customers value and they will buy no matter what.
You’re exactly right, and your example illustrates these points perfectly. Truly everything comes down to value and we should price our products and services according to such.Therefore, as we hone our skills as freelancing and get work done faster, with better results, it only makes sense that we increase our prices to reflect this value.
Of course, clients don’t tend to be happy about this but deep down inside they know that this is fair and justified!
James McAllister recently posted…7 Branding Mistakes That Will Destroy Your Company
One of the biggest benefits or keeping your prices on the higher end of the similar products spectrum, is that it makes you do everything you can to justify your higher price.
That means, you will do everything possible to build great content/product, customer service, delivery, guarantee policy etc.
If you’re only doing this to justify your high price, you have the bigger benefit of having a truly great product/service that people will benefit greatly from.
That will only put your product/service in higher demand and even higher price-point without complaints.
Donna Merrill recently posted…Learn to be a wildcat blogging entrepreneur to build a profitable blog
You’re absolutely right. High prices shouldn’t be high just for the sake of it, you need to justify it by stacking on the value. We give ourselves the opportunities to look for ways to improve not only the product, but our entire offering as a whole.
Honestly, this is a lot more exciting than looking for ways to cut costs, use cheaper materials, etc.
It’s just a safer, stronger, long-term play that is almost always worth pursuing. And our customers will love us for it!
James McAllister recently posted…5 Steps To Building A Better Connection With Your Following
I’m finally learning why this is true after a long time competing on price. I’m a pet sitter and I’ve always been working super hard, and hardly earning at all. I recently joined a local association for local pet sitters only to find I’m charging less than half of what they charge! Just goes to show it’s important to do real research into pricing, focus on your value, and not price based on what you could afford.
Hey Emily, I see your site that you’re from Bellingham, small world! My companies are all based out of Bellingham as well, with offices in Ferndale.
It is easy to fall back and think that lowering your prices will get you the customers you’re hoping for, but this really isn’t a good foundation to build a business upon. As far as services go, it’s natural for us to undervalue ourselves, especially early on in our company’s life.
It’s a far better (and safer) strategy to focus on how we can stack the value and then effectively demonstrate it to potential customers.
Anyway, so glad to hear that you made that discovery! Here’s hoping you raised prices accordingly.
By the way, if you ever want to meet up and discuss small business, marketing or other related topics, shoot me an email – my girlfriend and I are looking for more local connections to strategize with.
In any case, thanks for your comment – I will certainly be hoping to hear about your company’s successes in the coming months and years!
James McAllister recently posted…5 Ways To Simplify Your Business Strategy, To Focus On Execution