How to keep making money even if your competitors are killing the prices

One of my clients told me some time ago that he had a serious issue.

A major retail chain had just opened up a store in what was essentially his back yard. The issue being that 90% of my client’s product portfolio could be found there – at a lower price than the one he bought the products for.

The sales were plummeting.

 

Maturity of products leads to price drops

What my client experienced is quite common, and what usually happens in a market as it matures.

The products, which are new at some point, get popular. This, almost inevitably, leads to higher competition and in turn lower prices. When the large retail chains enter into the equation, it’s often game over for the small businesses. After all, if you buy 300.000 units of a given product to be distributed between the 1000 stores in your chain, your price per unit will not even be comparable to what you get if you buy only 3 units. The chain then uses these prices to take market share. It makes sense, although for the small businesses it blows.

If you want to compete on price, your margins will go down.

If you want to keep your prices high, your sales will go down.

Or will they?

 

A wise decision

Some time later I checked up on my client’s situation.

He now had more to do than ever before.

How come?

He changed direction of the company. Instead of going with the flow and lowering the prices to an impossible level, he did the opposite. He increased his prices and focused on providing the best service he could.

Why?

As any time spent on after sales, repairs, and customer service in general does not directly generate income, it’s seen as something that must be sliced down to a bare acceptable minimum in order for the benefits to be as high as possible. That’s why the repair time for a cheap laptop brand is substantially higher than for a machine from a high-end brand, to use that as an example. Not everyone is satisfied with that.

That’s what my client saw, and took advantage of.

The results?

By taking care of his clients’ issues swiftly, effectively and with a smile, he managed to increase his business. He even has gotten several new clients that were fed up of the lack of  – or slow – service received by the big retail store.

 

Marketing theory says…

In marketing theory there are two strategies you can follow if you are experiencing a pressure from your competitors in terms of price.

You can compete on price or you can be different.

Competing on price usually leads to the party with the deepest pockets winning – that is, the party that can afford to buy and distribute more products, or even lose money until the competition has moved on to other areas.

It’s still a viable strategy, but only if your costs are very low. Selling products with a margin of 1% can be done if you run a webshop. It’s not as easily done if you own a store with several employees.

Being different is what in the vast majority of cases is the best long-term strategy for small businesses (and even for big ones).

There are several ways you can be different, one of which is the strategy implemented by my client – to offer the best service possible.

Don’t be confused, selling a product with higher prices than your competitor does not mean that the product in itself is more expensive, but rather that you are offering more included in the price, namely service.

There are other strategies as well that could be implemented, something that will be discussed in an upcoming article.

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