Be Better, Not Cheaper

Who doesn’t love a bargain?  We all do, and we know our customers do, too.  But that doesn’t mean price is the only thing that’s important.  It becomes the only thing that’s important if everything else is the same.

Many companies feel they don’t have good differentiation, so they have to compete on price.  When Fortune 500 companies do this, the only implication is losing a few points of margin and billions of dollars of market cap.  When small businesses do this, they go out of business.  They either cannot sustain themselves financially, or they can’t sustain themselves psychologically.

That second problem may not seem intuitive, so let me explain.  Take a business that does 10% margins.  If the owner can raise prices 5%, she can increase profit 50%.  Or, she can make the same profit with a lot less work.  Less hours.  Less employees.  Less support calls.  Fewer customers.  Less stress.  If she feels she has to drop prices 5% to match a competitor, now she has to double sales just to get the same profit.  Even if this is possible, now she has double the orders to handle.  Double the chances of something going wrong.  She needs more people, more trucks, more inventory, more support staff.  More stress.  Even is she can keep the business afloat, at some point she’ll decide that it’s not worth trying to stay on a treadmill that keeps going faster and faster and doesn’t go anywhere.

What’s the alternative?  Be different.  Don’t let price be the only factor.  For many small businesses that sell the same commodities as larger businesses, the difference is service.  Note that a lot of the potential addressable market won’t care about your service.  They might even see it as a negative.  Don’t compete for those customers.  Go after the ones who value your differentiators(s).  The big companies have to appeal to broad markets.  That means there are niches where smaller companies can add value.  When a customer in your niche challenges your price compared to the big players, it’s a great opportunity to remind them of the value you deliver.

Remember, 10 years ago salesforce.com and Google were “niche” players in established markets.  Only hippies drank pomegranate juice or organic milk.  Blockbuster was the 800 pound gorilla of the movie rental market.