Why “Competing on Price” is a Recipe for Disaster

When it comes to pricing their products and services, many business owners make a simple calculation: if we set our prices as low as possible, without losing money on the deal, we’ll maximize our share of the market and therefore our profits.

That’s why, when we ask business owners here in Miami what they would like to be known for, many of them answer with words like “cheap”, “affordable”, or “low cost.” And then they put their energies into cost-cutting in order to keep their prices as low as possible.

It works for Wal-Mart, right?

Well, yes—but that’s because Wal-Mart’s massive size allows them to control all of the key variables, all the way along their supply chain. And it’s because their overwhelming volume of sales enables them to turn small profit margins into massive profits each year.

Most small businesses don’t have either of these advantages. So what happens?

Pricing products and services below market rates is usually successful in the short term, assuming they can get the word out. It’s not hard for such a business to build up a solid clientele of bargain shoppers.

But here’s the problem: As soon as a competitor finds a way to undercut their prices, their customers vanish. Why?

Because the only reason the business brought in customers was due to their low prices. There was no loyalty, other than loyalty to a low price.

What’s the solution? What’s a business to do if they lack the massive resources of a Wal-Mart?

Forget competing to offer the lowest price in your market. Instead, focus on providing value.

Think about it for a moment—do you buy the cheapest car you can find? Do you take your kids to the cheapest dentist you can find? Do you trust your taxes to the cheapest accountant you can find? Probably not, and here’s why: because the service providers you choose offer enough value that you’re willing to pay a premium for them.

So forget price. Instead, focus on providing value. Providing value builds loyalty. It offers immunity against competitors who slash prices to win business. And it allows you to make more money.

What does “providing value” look like in the real world? We’ll tackle that subject next week—stay tuned!

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Spotlight Branding

Spotlight Branding is a content marketing and branding firm for lawyers and other professionals. Our goal is to help you create an online presence that positions you as a credible expert in your field, keeps you connected with your network in order to stay top of mind and increase referrals, and to become more visible online so prospects can find you!