Why Not to Compete Based on Price
It can be tempting at times for a business owner to contemplate competing based on price – that is, offering a product or service at a price lower than their competition. The net result of this is hoped to be a quick influx of customers who will take advantage of the lower price, and then remain customers even when the lower price might no longer hold true.
In reality, for many businesses, this can break the bank and drive the business under. The reality is, competing based on price is simply a game of chicken – each competitor lowers their price in turn, until the last business standing takes all the customers. This is a very costly way to eliminate the competition, assuming you win, and there’s no assurance that another competitor won’t arrive to repeat the cycle.
That being said, this does not eliminate the offering of discounts or sales, but the reason should not be simply to be competitive. As an example, a chiropracter might offer a 20% discount on your first session because you’re a new customer. A printing company might offer a 10% reduction in the printing price for orders of over 10,000 prints. In other words, the reason for the discount is not in order to be cheaper, but because there’s another benefit to the provider to giving that discount.
Additionally, even if you intend to give a discount to the client, make sure that you inform the client of the value they’re getting before they’re informed that you’ll give them a discount. Once the subject of price comes up, you won’t be able to negotiate based on anything else. As well, if you’ve assigned a particular value to your work (e.g. $75 per hour), then you can always offer a lower price later, but you cannot raise it. If you start negotiating price too early, then you risk being trapped with having lowered your price below what the client would have paid, had you explained the value you provide in advance.
Compete based on value. As a business, you offer a mix of quality, service, and price. If you fix quality and service, then the price you should be offering should be set as a direct result. Offering a Rolls Royce for $30,000 will immediately make the potential buyer doubt its authenticity or quality. If the quality or service is higher, then the price MUST be higher too. Lowering your price will negatively impact your credibility, and thereby be unlikely to benefit you in any way regardless.