Many business experts warn entrepreneurs not to use price as the main competitive advantage. Even if you can offer low prices, once you engage a big player in a price war, your chance of winning is nil.
A good example is the ongoing price war between online video rental sites Netflix and Blockbuster that will result in lower profitability or possible losses for both players. Even big players like Samsung lose money due to price wars. Nevertheless, the biggest winners are the customers.
So what happens when a competitor engages you in a price war? Will you fight? The answer is both yes and no. Yes, because you have to do something about this situation or you will suffer. No, because you don’t need to lower your prices to compete. Here are your options:
- Focus on building a powerful brand. Powerful brands like Nike don’t need to lower their prices even if the prices of athletic shoes went down by 50%.
- Build value-added services. Don’t just over promise to your customers but make sure you over deliver as well.
- Talk to your customers. A creative way of handling this situation is to paint a grim picture of this price war over the long haul. Tell them that if you lower your price, you will have to shut down your business. If that happens, there will be lesser options and your competitor can dictate higher prices once again.
How to Avoid Price Increase in Your Small Business
Given the economic slowdown we are facing today, it is very common for our suppliers to increase their prices in order to stay afloat. In this situation, most entrepreneurs are compelled to pass this cost to their customers by increasing the selling price.
But do you know that there is a way to maintain your selling price despite the increase in your cost? It is called downsizing or reducing the quantity of the product.
Although this is not a common strategy even among big companies, an interesting study by Harvard University shows that consumers are more sensitive to price increase over quantity decrease. If the ingredients of Starbucks’ Mocha Frappuccino have increased for instance, it is better to maintain the current $4.60 price of venti size but reduce the quantity from 24 fl. Oz to about 22.
The downside of downsizing is the perception that you are cheating on your customers. Knowing this, you should inform your valued customers about this plan to avoid any misunderstanding.
On the other hand, you might also be interested to know why Drew’s Marketing Minute believes dropping your price to keep a customer is never a good strategy.
