The Price Is Right, Or Is It?

In order to keep up with the competition, you have to find other areas besides price, where you can gain an edge.

You are a small business owner, so ask yourself this question: Can you compete on price? Sure you can. All things being equal, that is. You can put things on sale and perhaps go toe-to-toe in a price war with the competitor—another small business—down the street. Now the next question, can you compete on price alone?

That is a vastly different question. Now you are saying that price is the only thing that differentiates you from your competitors, both large and small. It means that no matter what else your competition does, the only thing you will change will be your prices. On that basis, the answer is a resounding No. You cannot compete only on price. There are a number of reasons for this, but they break down into three areas: costs versus income, buying power, the customer.

Costs vs. Income

To compete on price alone means that you are going to undercut everyone. That is fine if you don’t have expenses like product inventory, overhead, employee salaries—little things like that. If the costs of doing business are nothing, then anything you charge is profit. That, however, is somewhat unrealistic. Instead, you have fixed costs and you have variable costs and you have to be able to meet these in order to remain in business. This means that, realistically, there is a floor to your prices. You can only go as low as your break-even point. No lower.

Buying Power

The issue of cost brings up something else, buying power. You have seen how places that compete only on price manage it: They are huge, and that is a definite advantage since it allows them negotiate lower prices from their suppliers, price savings that are then passed on to their customers. You may have a great relationship with all of your suppliers, but as a small business you generally don’t have that kind of buying power. That means your supply costs will be higher than the big box down the street and they may even be higher than some of your small business brethren and that brings us back that break-even point again. You cannot sell merchandise for less than you paid.

Your Customers

They are the lifeblood of your business. Without them, nothing happens. Do they come to your shop or office because you have the lowest prices in town? No, they don’t. Consider this: With all the big box marketing and advertising going on, do you really think that your customers don’t know they can buy for less at the Mega Stuff-Mart? Of course they do, but they come to you anyway. Why?

Because—and this is perhaps the primary reason you cannot compete on price alone—they are looking for more than just low prices!

It is true. They are seeking expertise, service, a relaxed, informal and, yes, safe, atmosphere. A big part of coming to you is the experience they have while doing business with you. That is the part they remember, not the money. When was the last time you went to a big box, where price is everything, and actually found someone in the department you needed who actually knew anything about what you wanted? It happens, sure, but so do solar eclipses and pretty much on the same timetable. That is not the case in your shop. A customer comes in and you are there to take care of them, not to simply take their money. That is the difference and if you decide that you will try to compete only on price, that difference will be lost.

Your Customers Are Royalty

This is where you differentiate your company from the competition, in how you treat your customers. If your two favorite movie stars walked into your establishment, how would you treat them? How would you want your staff to treat them? Now, ask yourself if you are treating your regular customers that way—anywhere close to that way—and if the answer is no, then it is time to take a hard look at your customer relations.

It’s true, you are in a relationship with these people and like any other relationship, you need to work at it and nurture it to keep it healthy. Small companies that do that, those that nurture their customer relationships, tend to do well, regardless of big box competition, while those that forget this lesson and focus only on price or something else—anything but the customer—do not do nearly as well.

That kind of failure is definitely something to steer clear of. —Charles Cooper

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Reader Comments

Wednesday, February 10, 2010 at 12:46 PM
mike turner says:
Yes, a "differentiator" is necessary when in direct competition. To get a customer, you start with prospects. How to get prospects , then becomes the first challenge, and, here you still need a "differentiator" besides price. We have found that discounted prices cost merchants profits and stature. Why not use a 'gift (FREE) incentive' that has "high perceived value" as an add-on to the purchase? If it is low-cost to the merchant, it can be absorbed at LESS profit loss than an out-and-out dollar discount! Nowadays, Gen "Y" and , most other generations, are looking for FREE incentives to sweeten the deals. "Incentive Marketing - Mike Turner"
Wednesday, October 14, 2009 at 9:06 AM
Ed Roach says:

While I absolutely agree with all of your comments, your suggestion to use customer service as a differentiator with customers has with it the caveat that they are "customers". Maintaining them with exceptional service is spot on.

However attracting "new" customers would need a differentiator that is absolutely compelling to keep them out of commodity hell. This would involve being the LEADER in something, or the ONLY something or some distinguishing positioning strategy that makes it the only choice for a potential lead in search of a product or service.

You can use customer service as a basis for a differentiator here as well, ie: Enterprize Car Rental and their offer to pick you up was a drastic departure from the car rental industry norm. This is a compelling differentiator.

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