Cutting costs might seem like a simple and direct way to gain market share and beat the competition.
Especially if there’s a downturn in the economy, customers may become even more price sensitive, pushing them to find low-cost providers and choosing based solely on price.
It’s obviously great for customers, as businesses band together in a race for the bottom and prices plummet. Big savings all round! Obviously, not all companies can survive a cost-cutting war, especially ones with high overheads (and maybe fat cat salaries), which is what competitors who initiate a price war may rely on – it’s a game of survival, and once the competition dries up, the winner resumes the higher prices and picks up a bigger market share.
It might work for telcos, internet providers, petrol companies and supermarkets but what about your business? Is lowering your price a good strategy for growing your business?
The short answer is: it depends.
Our cheap website story
There are certain business types that are not well suited to price wars. Ours is one of them.
We’ve been in business over 10 years and built a lot of good websites at dirt cheap prices.
And it works, because who doesn’t love a great deal, knowing they’ve saved hundreds or thousands on what they might have paid somewhere else. There’s sometimes disbelief the prices are real, but the proof is in the pudding, and the customers that keep coming back.
But while it helped us get started, the crazily cheap prices weren’t the reason we’ve stayed in business for more than 10 years. That’s because if price is your only unique selling point (USP) then it’s really easy for a competitor to just undercut you, and your whole business is sunk.
And these days your competition can come from anywhere: an established business diversifying, the 16-year old whizkid across town operating out of his bedroom or an office of cheap labour on the other side of the world. It’s a sure bet that it won’t be long before someone is able to offer the same product or service for less (or free even).
So, what do you do then? Lower your prices? You might be able to do that, maybe for a short time, but unless you’ve found a way to further lower your operating costs you’ll just drive yourself into the ground.
Strangely, after all these years we still haven’t found anyone (here in NZ or overseas for that matter) with cheaper website prices.
For our type of business that just didn’t make sense, and if your business has any of the following characteristics then it’s also not suited to engaging in a price war.
When cheaper is not a good idea
We wrote a post a few years ago about price points and how cheapest wasn’t necessarily best. The thing is, price isn’t everything, and that counts in some businesses more than others.
- Service-based businesses where you are the service provider (unless you’ve figured out how to clone yourself!)
- Services where better quality can mean better ROI for the customer
- If trust, local knowledge and good communication are important
- Where after-sales service and support is a key part of the product or service
- If other factors are more important than price – response time, convenience etc (the reason you might buy local instead of ordering from Aliexpress and having to wait six weeks)
So, unless you can duplicate your product or service for little or no cost (like software companies), then price can’t be your only selling point. It can be one of them, and there’s no harm using it as a loss leader to get customers in the door, but you need to find some other way.
If you need some advice, you could do a lot worse than heed the words of one of the world’s most successful businessman, Ray Kroc, who is quoted as saying:
“Look after the customer, and the business will take care of itself.”
And he’s done just fine without having to lower his prices – we all know there are plenty of other places you can go to get a cheaper version of his product…