When a company uses this strategy is a clear sign that the organization does not know their customers and their market. In other words, they do not know how to create value.
Among the problems, your company may face if you use this strategy:
- Decreased profit margin. Which means you're closer to losing money, if you mess up something.
- Your customers perceive your product as "low quality." For many customers, an inferior price is a sign of low quality.
- You attract poor-quality customers. These customers are price driven, combative, speak ill of your organization and do not perceive the value of your products/services.
- You are the last resort. Any relevant or strategic purchase or service they need they will get it from your competitors.
- No customer loyalty.
Prices are a perception of value, and only a company with high prices can invest consistently in:
- Quality Materials
- Best Sellers
- Better locations
- Improve working environment
- Functional packaging
- Delivery Processes
The following rules will help you to establish better prices, which not only allow you to increase the profitability of your business, but also the satisfaction of your customers:
1. There will always be someone willing to lower the price more than you.
Winning market share decreasing prices is both complex and risky. Many organizations ceased to exist after using this strategy. Moreover, they hurt the entire market profitability, given the impact in the costumers' perception of value.
2. For most people cheaper is not better.
People will always have money to buy what you are selling, but need to understand why they should give you their money over other cheaper options. If your prices match the perception of value, they will buy it, even if they need to borrow money. People do not buy Apple´s products to get the latest technology, or a Rolex to keep track of time.
3. Not everyone is a potential client.
Although clients are the most important for a company, not all of them drive your business growth, on the contrary, they hinder it.
When companies fail to market their products and services correctly, they attract low-quality clients. Such clients are difficult to retain, because they are price-driven. They consume more time, energy and resources than what they are paying for. Moreover, They can generate cash-flow problems due to delayed payments.
Instead, focus on customer who understands your value proposition, for which what you offer is relevant and is willing to pay for it.
4. Which is your special sauce?
If price is a perception of value, then only if the customer understands makes you different will pay you more. In other words, if a person can't easily differentiate you from your competition, he will base his decision on the price.
Your secret sauce is what makes you unique, valued and relevant to your customers.
The differential does not have to be in the product or service. Sometimes it's not what you sell but how you sell it.
Not everything that makes you different creates value. For example, when you provide a good service and quality products, you are complying with your customer's expectations, not differentiating you. Only if your clients believe that what makes you different is relevant are they will be willing to pay more for it. In this case, being able to provide better service is a strength, but it does not make you unique.
Your secret sauce is not necessarily part of your products or services. For instance, some companies may sell standard products whose qualities are difficult to improve, but still, they can differentiate if they:
- Offer different services (specialization)
- They create emotional connection with customers (storytelling)
- Specialize in a niche market
- Offer a memorable experience
- Have a human talent happy to work with them
- Provide a better distribution model
- Improve product design
- Improve business processes
5. Communicate, amplify and promote what makes you different.
What makes you different is not what you say, but what you do. You cannot change the perception of your customers with a great advertising message. The perception of your clients is built on a daily bias, with each exchange between the company and its clients. Only if your message and the reality are consistent, they will trust you.
Now, you must be willing to show all your magnificence to the world, as do peacocks. So your customers fall for your value proposition.
Sometimes it's not about what you sell, but how you sell it. There are some great companies, with amazing services and products, which sell far less than their competition, basically because they do go out there and tell their target clients here we are, and this is what we can do for you.
6. No competitive advantage lasts forever.
Differentiation is an ongoing process. Daily, we must be able to give reasons to our customers to keep choosing us. Competitive advantages expire mainly because competitors copy us or as a result of time. Preferences and expectations of our customer's change over the years, and we must be able to adapt to these changes, and ideally to anticipate them.