Competing solely on price is a recipe for disaster!! Why???? Well for one………….
Retailers today, generally want to position themselves as the cheaper option. They believe if they sell their products at the lowest price possible, without incurring losses, they will maximize profits and even increase their market capital. Fair enough. This may work for larger retailers like Coles and Woolworths but not for small businesses!! Small retailers and new companies must always bear in mind, larger and more established entities can often choose to lower their prices to create an unfair market advantage or simple barriers of entry. What does this mean? Well put simply regardless of how low you go, your larger competitors more often than not will aim to match your prices and are in a better position to do so. In some cases such entities are willing to forgo potential income such to price out the smaller completion. Larger retailers have the advantage of economies of scale. Their size alone allows them to control key variables along their supply chain, coupled with large volumes of sales, which enables them to realize large end of year profits from small profit margins per product. Small business cannot compete on this level. This is a “big boy’s game”. The advantages of economies of scale are only reserved for the elite few. Remember when your mother told you, that you were told small to play with the big kids, because you might get hurt? Well this is the same principle for small retailers trying to lower the price of their products and services in competition with larger retailers. This may seem successful in short run, once the market catches wind on the advertised savings/discounts. However the increase of sales is usually attributed to the influx of bargain shoppers and not loyal customers. Building a brand solely on solely on low prices, erodes customer loyalty. As soon as competing retailers undercut your prices, your customers vanish. Why – because what got customers through your doors was marketing promoting low prices and not product/service value. Your business was not based on consumer loyalty, rather loyalty to a lower price. The hungry dog always goes to the person carrying the biggest bone! So how do i compete with the giants you ask? The same giants who are increasing their “market cap” by dangling lower prices to a bargain hungry economy? Throw competing to offer the lowest prices – out the window! Let your strategy be solely based on providing value! Going back to the hungry dog analogy, if the dog is loyal too you and derives some sort of value from you, chances it will come to you, no matter how big the bone the other person is carrying!! Let’s think about it for a second. Do we send our children to the cheapest doctors we can find? Do we build our family homes with the most reduced building material? Do we only consider the buying a motor vehicle if it’s the cheapest on the market? Do we choose our education based on the most discounted courses? Definitely not!!! Why – because humans naturally seek value!!!! People are willing to pay for quality! But frankly – We like nice things and if we perceive value in them we are usually more than willing to pay extra for them! Tim Donnelly a freelance writer and managing director of Brokelyn.com, gives the following example of consumer’s willingness to pay for value: “In a famous video clip from Penn and Teller’s Showtime hidden camera show, diners are lured to an upscale restaurant branded as the world’s first boutique vendor of bottled water. A water steward presents each table with a menu discussing the finer qualities of water purportedly shipped in from mountains and streams all over the world, some of which cost as much as $8 a bottle. Of course, the joke is on the customers because all the water actually came from the garden hose out back, but the message was clear: People are willing to pay more for a product if they think it gives them a truly special or significant value—and if you present it to them in just the right way. Your company is probably selling a stuff that’s a lot more valuable than fancied-up hose water. Selling on value, not price, involves a balance of confidence, personal rapport, and doing your homework, and it’s become more difficult as technology gives consumers greater access to price information and competitors” (Donnelly, PUBLISHED ON: JUL 20, 2011, How to Sell on Value Rather Than Price, Retrieved from http://www.inc.com/guides/201107/how-to-sell-on-value-rather-than-price.html ). Adopting the value approach shields you from competitors who are continuously reducing their prices to gain customers. Value builds loyalty – being cheap….just means you’re cheap! So how do we create value???????
– Tanaka Musiwa – In collaboration with Colin Kane.