Price is one of the major factors customers consider when they want to buy a product. It is tempting to use price as an incentive, especially for emerging businesses, but it can quickly turn into a huge mistake.
If you compete on price from the very beginning, you’ll start this never-ending story based on controlling costs and lowering the price each time your competitors will offer better deals. Keeping costs down will be your main focus. Especially when you know that your competitors can change prices right after you do this. It usually begins the price war.
Starting price wars can lead to losing market share
Price-cutting makes sense in some cases, such as having a cost advantage over your competitors. This is why you can see large supermarkets that can offer competitive prices because of their agreements with suppliers. However, it’s not that easy to provide quality when you compete on price.
Think about it this way: What if the competition will reduce prices even more, and you won’t be able to do the same in response? You need to realize that there’s always someone who can offer the same product or service for less money.
Use price as a lever to increase market share only if you are certain that you’ll win the war. Otherwise, ignore your competitors’ moves. Always keep in mind that when something goes wrong, it can have an impact on the quality of a whole industry.
The results of the slashed prices
If sales drop, one of the things that spring the marketing and sales teams minds is to lower prices to win customers from competitors. Why it’s not a good idea and what would be the consequences of it?
Lower prices often equal higher sales and increased profits, but only as long as you are charging enough. But the truth is that when you underprice your products, you’ll leave money on the table.
When you sell more, you would have to hire more people to help. There’s also a risk of inferior customer service which can cause more unhappy customers. Why? People that look only for the lowest price are usually the pickiest ones. So perhaps it would be better to leave them to your competitors, don’t you think?
Note that when products are too cheap or much cheaper than the competitors, people start being suspicious and would rather buy the same item somewhere else, just in case. Low prices also can take away high-quality clients, as for them the lowest prices are a red flag. It may also position your company as one that provides low quality, especially when you don’t have brand recognition.
You can then have difficulties to retain customers. If the only incentive for them to buy is the price, they can constantly search for cheaper alternatives. This means that when they see a more attractive offer somewhere else, you’ll lose sales.
If you compete on price with some bigger companies that can always go lower than you, you can even lead your business to bankruptcy. Simply put, you’re missing the chance to grow.
Low prices also make you have to work harder, as you need more clients to make it all profitable. Competing on price is not an easy task and once you start, it’s hard to get out. Not to mention that reducing prices can have devastating effects on the profit margins.
Don’t stick in the low-price trap
What can you do instead of competing on price?
When you think about your pricing strategy, it’s obvious that the major goal is to maximize profits. But, you should also think about something else, such as the target market you want to attract or the way you want to position your brand, to name a few. Then, you need to be consistent.
You need to put a strong focus on your service or products’ advantage and find buyer segments that could be your future customers. Make the quality your selling point and tell people why your product is worth more. Sometimes offering less product for the same price also can help to reduce costs, but you need to be careful in this case. The price needs to be consistent with the delivered value.
You can also offer higher price by evaluating added value. Always monitor what happens after raising the prices and find a way that makes you benefit from your pricing strategy. However, keep in mind that every time you increase prices, you need to be aware that you can lose some part of the customers. All in all, price optimization can have a great impact on maximizing profit.
What also can help is having an excellent refund and exchange policy. The same goes for providing amazing customer experience to build a reputation as a vendor that everyone wants to buy from. Also, give discounts or freebies from time to time to the most loyal customers or to make up for a bad experience. Another thing you need at your store is great customer service that builds trust.
Once you start with low prices, it’s not that easy to get out
If you think that undercutting every product is better when you start, you’re wrong. This is a typical beginner mistake, as most of them don’t have the confidence to offer higher prices (even if they should).
Keep in mind that there’s always been a competition on the market and it’s on a constant rise, so businesses need to find other ways to stay ahead of other companies. The price should be connected with the overall marketing plan. It tells a lot about the company and positions it in a certain segment of the market. If it doesn’t work, perhaps you should move to the less competitive ground.