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

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:

• First, read about how you can focus your sales, marketing and operational efforts to create a unique customer experience and capitalize on the catalog of value that your small business embodies in 6 Tips for Creating a Customer Experience that Embodies your Unique Business Value.
• What are your competitors up to? What do their customers think of them? Read 5 Tips for Getting to Know Your Competition and using it to Your Advantage.
• Next, transform that “business value” into your marketing. We’re not talking about advertisements or flyers, but what you tell your customers about your company, what it does, and why they should do business with you. Read 7 Tips for Getting your Marketing Message Right.
• Finally, be an evangelist for your business and its unique value. Read how in this real-life example of SBA Metro D.C. Small Business Person of the Year 2006 and owner of CakeLove, Warren Brown in:Five Tips for Building your Small Business Brand Using its Best Advocate; You!

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

Related Articles

• Balancing Profits and Customer Service: Tips for Determining Effective Pricing Policy Practices

About the Author

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