Low Prices Are Not the Answer

Dan Blank -- Expert Business Source, 1/18/2007 6:44:00 AM

Rhonda Abrams of USA Today looks at the old stand-by: beating the competition by offering lower prices. The rationalizations for this are strong:

• Undercutting the competition will generate more sales, making up for smaller profits.
• Larger companies only seem to emphasize low prices.
• The awareness that customers comparison shop, and price is a leading component they look for.

However, this does not always meet with reality. The risks:

• A lack of cash.
  Low pricing means narrower profit margins, which means, less cash. With a smaller financial cushion, you are vulnerable to every slight increase in costs.
• Pressure on staff & marketing.
  You will feel pressure to reduce costs, including two of your most valuable resources: wages and marketing. Your sales staff will grow less motivated, productive and loyal;marketing is the one element that businesses who differentiate by price need a lot of.
• The end of loyalty.
  Customers who only focus on low price are fickle and have no loyalty to your store. If a competitor offers even lower pricing, your customer base will disappear.

That said, pricing is still incredibly important. Here are some tips on remaining competitive, especially when you don’t have the buying and pricing power of larger companies:

• Specialize.
  Consumers have become enthusiasts, and many smaller niches are very lucrative. If you can carve out a niche in your area, you have just eliminated your competition.
• Innovate.
  Find simple ways to reduce costs on non-critical items. Analyze all of your processes and identify where there is waste in product, resources or time.
• Focus on customer experience.
  What do you offer that no one else can match? Your brand is about more than price – focus on the entire customer experience, and find ways to illustrate your quality in service or product, over the competition.
• Target.
  Ensure your marketing efforts are targeted to customers who appreciate the value proposition of your business.
• Create relationships.
  Build loyalty to you, not your price. Even if you use pricing to lure new customers, ensure you develop that relationship beyond this one factor.