Do you compete on price? Bad business decision!

The price a business owner establishes for the sale of their products and services is arguably one of the most important business decisions they will make. And yet, pricing is one of the most feared elements in managing a business.

One of the many conversations I have with business owners is on pricing, and those discussions usually start with me saying, “Your prices are too low.” They look at me in shock and often respond with all the reasons why they cannot raise their prices:

  • I’ve lost jobs because I was too expensive.
  • I’m more expensive than some of my competitors.
  • I’m barely making enough profit as it is, and I can’t afford to lose customers by raising prices.
  • You have got to be joking— put my prices up in this depressed market?

Responses like that generally indicate those business owners don’t understand the impact pricing has on a customer’s perception of their business and its branding in the market.

If your prices are too low, your market will label you a low-end player and you’ll attract bargain hunters who will invariably try to get you to discount your products even further. Lower prices also make it unlikely your business will build long-term relationships with customers, who by their very nature will shop around to get the best prices on a product or service, not staying loyal to any one business.

Higher pricing raises customers’ expectations of a business, which can be a challenge. But if you constantly deliver on those expectations your business will usually enjoy customer loyalty, and you will attract a better quality customer that is willing to pay more for quality customer service.

It comes down to branding. What does your business, your brand stand for? What is the promise you make to your customers? Branding is about building a relationship with your customers, and over time they expect certain things from your brand, as that is what you have promised them.

A brand can turn something that is pedestrian or homogenous into something that is unique and that stands out from the crowd, regardless of the market. If a business is branded it can set you apart from the rest. A strong brand builds respect, loyalty and retention, and allows a business to set its pricing strategy accordingly.

Dr Michael LeBoeuf, international business consultant, focuses a lot of his work on how to win customers and keep them. He created a matrix based on extensive research on why customers leave a business.

Why Cutomers Leave a Business

Why customers leave a business

Based on that research, of those customers who leave a business, only 9 percent leave due to pricing, whereas 82 percent of customers leave because they are not treated as special or there is an unresolved conflict. In essence, they leave due to a lack of customer service.

Therefore, key to the success of your business is not worrying about the price you charge your customers, but concentrating on the customer value proposition you deliver to your customers to keep them happy and returning for more. It’s about going beyond the call of duty to provide value and service to your customers. It’s about creating customer cheerleaders, customers who will be loyal to your business for a long time and at the same time, will refer their family and friends to your business too.

Pricing is not an arbitrary decision; all businesses should have a pricing strategy. When determining your business’s pricing strategy, the key is to determine your value proposition for your customers, rather than pitching your business against your competition and attempting to undercut them to win more customers.

Get that right and your brand will create an impression in your market, and you can price your products and services according to that positioning.

Never compete on price. That is a business decision that will see you, your business, and your staff and suppliers lose in the end. Why? Because, if you are prepared to discount your price once, you will do it again and again. At the beginning, in order to maintain your profits, you can create increased operational efficiency within your business to compensate for reducing your prices. If you continue to reduce your prices, then eventually you will need to reduce your staff numbers or their pay (or both), and no doubt you will also be asking your suppliers to reduce their prices to you. Do that for long enough, then your staff can’t afford to work for you and your suppliers won’t be able to afford to supply your business, so you won’t have a business. It is a lose/lose business strategy.

A brand is a differentiator.   A brand is an image. A brand is a promise. A brand is an experience. A brand is a perception. A brand can move a business or a person from the ocean of obscurity to the river of relevance and riches. Focus on building your business brand, and competing on price will be a thing of the past as will the fear of making pricing decisions.