How do you react when your competitor lowers their prices? If you follow suit by lowering yours, you have just started down a treacherous path. There are better ways to respond, so let's examine your options to keep your business healthy and profitable.
Since there are so many different types of businesses, and pricing is a concern to all of them, let's take a quick look at one where prices are especially tough. That would be retail, where competitors are selling exactly the same thing, and there are limited options to control operating costs. If I can illustrate with small grocery and convenience stores, that would be even more powerful because these businesses are especially challenging.
As it turns out, the perfect testing ground was created and studied back in the mid 1990's. Now business has changed since then, but human nature has not, so the lessons are still valid. I will only highlight the important points because detailing the study is just plain boring.
Before 1996, Rhode Island had a law that retailers could not advertise prices on alcoholic beverages. When this law was challenged, Tufts University decided to do a detailed study of the effects both with and without the advertising restrictions. By studying the market, they measured conditions for well over a year before the ban was lifted, and, monitored the market for over a year after the law was changed. Retailers of all sizes were studied. To keep the study fair and make sure other factors were not tainting the results, they also included Massachusetts because it did not have an advertising ban.
The only thing really clear after the study is that free enterprise is self-cleansing. Conventional wisdom suggests that advertising prices drives down the prices, but very little support for that was found in this case. Most importantly, although retailers who advertised and lowered their prices did increase sales volume, the gain was not very impressive when you figure the lower profits and advertising expense. Many retailers chose not to advertise because they didn't want to attract "cherry pickers" (those who buy only the deeply discounted item). As you might expect, the advertised specials made other items more expensive, but these other items also ended up being more expensive at stores that did not advertise.
The real lesson here is when you see your competitor lower their prices to attract business, rest assured there are other important factors that influence buying. I said this in another article, but it's just as important here. People buy for one or more of the following reasons: to make money, to save money, to save time, to make things easier, to make them feel better or satisfy a desire, to solve a problem, and/or to take away pain. Make sure you consider these in your pricing strategy.
When your competition has to resort to price slashing, it shows they lack creativity. It takes very little brain power to slash prices except for calculating how low you can go. A much better response is to increase value. Ask yourself, "How can I make my product or service worth more?" You will always find buyers when value exceeds the price. It will often cost you little or nothing outside of creativity to add value. This allows you to increase profits, and happy customers will provide more referrals and repeat business.
If your business uses sales people who get commission, price cutting can be even more devastating. This forces sales people to work harder for less money. Since these people are fueled by motivation, price cutting is not a wise strategy. In fact, the sales force is a gold mine of information on how you can add value and get more sales. They will also appreciate being asked for their ideas.
Another great source of information to help you add value is your customers. As simple as it seems to get their input, it's amazing how many businesses are not taking advantage of this resource. In addition to what you can learn, you also build stronger customer relations when you are genuinely interested in their opinions and observations. This alone can provide an advantage they may not get from the competition. You might also be surprised at how rarely (if ever) they will tell you to lower your prices.
Overall, be glad you have competition. They keep you striving so you can be better. They even provide a standard you can use for your own pricing. Just don't feel like you have to be limited by that, and most certainly, don't lower your price just because someone else does.
Proven Alternatives To Lowering Prices - To learn more about this author, visit Steve Chittenden's Website.
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Steve Chittenden
(Visit Steve's Website)
Steve Chittenden has been a small business
owner since 1986 when he started a sign
and graphic design company. His current
company, Creative Business Services in
Grand Rapids, Michigan, began in 2002 and
provides carefully planned web
design, graphic design, writing, and
marketing services to help other small
businesses to succeed. He is a strong
advocate of small business and operates
from a firm belief in the Bible as the
guide in his Christian faith and business
practices.
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