Never Compete on Price: The Most Misunderstood Business Advice
Tuesday, April 28, 2015
It has become fashionable for business folks to say "never compete on price." In many cases, they're right on the money. Thrifty customers are a flighty group and will likely switch to even lower cost solutions, should any arrive in the marketplace.
"Never competing on price" makes a good deal of sense, but this guidance contains a great deal of subtlety in its wording. While one should rarely use low pricing to undercut a competitor, not all firms that solve the same pain are, in fact, competitors. It is quite possible for several companies to divide a market into discrete segments, such that none competes with any other.
For instance, an established firm catering to enterprise-level clients may be far too entrenched for a newcomer to face in direct competition. The former's sales channels, relationships and reputation may simply be too strong. Yet the firm's high price point would likely leave small businesses out in the cold. A new entrant could easily capture these diminutive firms by pricing its products lower than the incumbent's. Such a strategy is not competing on price, so much as segmenting on price. It happens more often than you might think.
As an example of two companies addressing different segments of the market, one can look to Toyota and Ferrari. Each sells automobiles to individuals, with Toyota utilizing a significantly lower price point. Few would argue that the manufacturers compete with each other. After all, there aren't many people who would spend much time debating which of the two to purchase. Each is clearly intended for a different customer profile.
Competing on price is a surefire road to financial ruin, but segmenting by price... that is something worthy of consideration!
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