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How to Avoid Falling into a Price War by Focusing on Value

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How to Avoid Falling into a Price War by Focusing on Value

By Caron_Beesley, Contributor
Published: September 1, 2011 Updated: May 4, 2012

Have you ever considered lowering your prices in order to increase sales or remain competitive?

In the current economy it’s a question faced by more and more business owners looking to attract new customers and keep existing customers coming back. The trouble is that the answer isn’t always black and white.

Cutting prices can have a number of consequences:

  • It lowers the perceived value of your brand and product –Even the big brands are guilty of this and the effect over time is detrimental. Like everyone else, many mall-based clothing chains are struggling to hang on to their market share in this tough economy, and are literally handing out online coupon codes and deep discount sales on a weekly basis. This in turn leads the customer to know and expect price cuts, and, of course, any informed buyer is going to hold out for the next sale rather than pay full price for a product they have come to see as over-priced.
  • Once you cut prices it’s hard to put them up again – Anyone who has ever bartered or sold anything can tell you that once you take that price down it’s very hard to justify adjusting those prices up again.
  • It attracts customers who only care about price points – A business’s unique value very rarely hinges on price; it’s usually a combination of price, product, reputation, and value that it brings to the market it serves.  By changing your market strategy to focus on cutting prices you are essentially undermining all the good work you’ve done to build your brand, and there’s no going back – you’ll find yourself having to cut prices on every job or service you offer.
  • It’s a war you can’t win – Cutting prices across the board is never a good idea because when you cut, the competition cuts, until the business willing to tolerate the lowest margins prevails and it’s usually the lower quality competitor. There are no winners here.

When Does Cutting Prices Make Sense?

There are situations where cutting prices does make sense – after a little research and market repositioning.  Here are just some examples:

  • Short-term price cuts to clear inventory – Very commonly used for end-of-season, end-of-line products. There is nothing wrong with this strategy, but be sure to put a time limit on the offer so that customers have an imperative and don’t come to expect these prices to be around forever. Have a plan for what to do with the products you don’t sell. Putting them back on the shelf at full price again might send the wrong message. Consider selling them to consignment stores or other outlets.
  • Offer a different, but less expensive, product or service in addition to the higher-priced one – This may not be appropriate to all businesses, and will only work 1) if the product is different and 2) you know there is a different market for that lower-priced product. For example, a deck staining company might notice that certain markets are willing to pay more for more labor intensive hand-painted deck staining services, whereas other markets are happy to accept spray-applied stain, a treatment that takes less time and manpower, at a lower cost. This is a simple example but the variations and marketing opportunities are endless. This price strategy gives your customers choices without undercutting your margins or compromising your brand.

Be sure to review your profit margins and bottom-line before you make any price adjustments. It’s important to know what your business can tolerate. Small business expert Rieva Lesonsky offers some useful tips for things you need to consider as you review your profit margins in her article: Is a Lower Price the Best Option to Increase Sales?

Focus on Value Instead

With all this talk about price it’s easily forgotten that most small businesses build their brand and their success on the value they deliver. Value is so much more than price, it embodies the product, your team, your leadership, and customer service – and it can help differentiate you in a crowded and competitive market.

Consider the residential painting industry, for example, there are literally dozens of companies competing for the same dollar at varying price points. But value rarely comes down to price. For example, a local painting company with a host of positive testimonials to its name and a reputation for doing owner-supervised quality work may not be the cheapest in town – but for many customers the company’s reputation speaks volumes and they are willing to pay that little bit extra for good work.

Selling on this value instead of price will consistently differentiate you for the long term despite the temptation to fall into a price war with the competition.

How do you do this? Know your target market, your competition, your product and your advantage.

Here are several articles that walk you through the process:

How do you deal with price competition? Leave a comment below or post your questions on our Discussion Boards.

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About the Author:

Caron Beesley

Contributor

Caron Beesley is a small business owner, a writer, and marketing communications consultant. Caron works with the SBA.gov team to promote essential government resources that help entrepreneurs and small business owners start-up, grow and succeed. Follow Caron on Twitter: @caronbeesley

Comments:

I tried to take the positive value of these war!
i hate price war, ebay seller do that.
Thanks for this article, I am a new small business owner in the area of exam preparation for medical students. In my field, there are only a few companies out there who are doing what I do, so I have a chance to compete essentially right from the get-go, but I am struggling as where I should leave my prices. I have started them out much lower than the rest of the more established companies, but I am certain that the value I am offering my students is greater than the others (I have been to all the competitor's courses). Since I don't yet have that reputation, I am very hesitant and perhaps even worried that students won't pay the full price, so I have been offering revolving 50% discounts on the tuition. While this has brought me a few students, I am also wondering if the non-stop discount is lowering people's perceived value of what I can offer, and am actually thinking about bringing price points up to compare to the more established prep courses. As you can tell I am struggling as far as which way I should go... should I keep my initial price point, lower them on a revolving basis, or even increase the price to show students that I mean business and they will get value for their money. Any comment or advice is greatly appreciated. Here is my website so you can get an idea of what I am all about, Thanks! USMLE Prep Courses
To many businesses today really dont provide value let alone good customer service. To me as a business owner the most important thing in my business is the customer so if I dont provide value how can I expect to get customers coming back. As a small business it is hard competeing with the big guys but I still believe that if your give a great service then you will get customers who will be willing to pay extra if need be. Thanks for your insights . Peanut Butter Cookies
Great ideas. Thanks for sharing. Lowering the prices in order to increase sales could be one of the alternative if we could do this. Garmin 610
It has been our experience that the lower price companies tend to be the first to go out of business. Many customers are looking for exceptional customer service, innovation and longevity. There's nothing like buying a high dollar item with a lifetime warranty, only to find out that the company is belly up just a few years later. Seems to be happening to a lot of our competitors when it comes to Tornado Shelters
It all makes sence untill big guys in the business start selling stock at loss to kill off competition from small companies. UK guide
Going into a price war is not what you want. I´m in the stove business and what I do is to level the price and then offer a better customerservice. Make a decision about your lowest price and stick to it. Try to win the `war` on other terms, like trustability. Kindly regards, houtkachel
Focusing on value makes good sense. Cutting prices is a last resort option after you've done everything to build value into your products and services, and then promoting them well to the right target audience. And of course, cutting prices across the board is a lot different than short-term discounting or couponing. Here's an article on the pros, cons and tips of couponing: http://bit.ly/i6qwRk
Great article and thanks Caron for the useful links. Will study them and try and incorporate in my business. I am basically into health and spa, this sector is overflowing with spa deal which are online and even the average spas are getting there names here. The problem being, in a city people are buying looking at the price. I been trying to answer , how to differentiate my brand and hang on to the higher price to be an esteemed spa brand

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