When you compete on price you make your business vulnerable to your competitors who can simply drop their price to take your customers. Unless you know that your business will be the market leader, competing on price can be a tough way to grow your business. It’s hard enough to find customers that want your products and services, but what do you do when your competitors are lowering their prices below yours? How are they making money? The answer may be simpler than you think.
Price is the most obvious way to gain customers which is why it is the most vulnerable part of a business. Many small businesses are not entirely sure that their margins are right or what the levers are that they can push and pull to get better margins. I believe this is because many entrepreneurs are so busy running their business that they don’t take time, or don’t have time, to really understand the value that they provide to customers and how to charge for it. As a result, they price their products and services close to or just below their competitors. That’s the easy (and lazy) way to price what your business offers. It’s not until an entrepreneur gets into a rough financial moment that they are forced to examine what they are doing, what they can afford to pay for and what they charge customers in order to keep their business alive. Do they have the right amount of staff? Do they know what their staff are contributing to the bottom line? Are their costs appropriate and are they being used to generate the greatest margin possible? These are all the types of questions that I think entrepreneurs would love to answer but are not sure how to do it.
Back in October the online stock brokerage company, Schwab, announced that they would allow their customers to trade stocks at no cost/commission. This was a monumental move that was quickly followed by their closest competitors including TD Ameritrade and E-Trade. How do companies that generate revenue through trading commissions survive if their service costs nothing? Clearly it was strategy that was meant to force the weakest company to surrender. It didn’t take long for rumours to circulate that Schwab and Ameritrade will most likely merge making Schwab the clear market leader. When any market place gets saturated and companies become hard to distinguish from each other, a price war usually breaks out and consolidation occurs. The thinking is that online brokerage is a marketplace that is ripe for consolidation and Schwab appears to have made the first move.
You don’t have to be running a publicly traded company to understand the impact of price. Every small business competes to some degree on price. If your business is a market leader you have the opportunity to give up margin and wait for your competitors to close up shop. If your business is not going to be a market leader, then you need to figure out how to add more value to the experience your customers engage with when they purchase the products or services your business offers. People pay for value. Value is a non-mathematical calculation that customers make every time they spend their money. People will pay disproportionately more for a better experience which may be an opportunity that your business can take advantage of. How will you make sure that your business doesn’t get squeezed out of the market because of pricing? Will it be because your business is doing the squeezing or will it be because your business has found revenue opportunities that are not sensitive to price?