The Infinite Loop – Why You Shouldn’t Compete on Price
All purchasing decisions are ultimately a trade-off between three key elements: price; suitability; and experience. This trade-off applies regardless of whether you are buying a product or purchasing a service.
In a competitive environment, price and suitability typically reach a point of equilibrium, meaning that the suitability of the product or service and its price become broadly consistent across most competitors within an industry. This leaves experience as the main element of differentiation.
There are many examples across multiple industries where competitors fight for market share by delivering a superior experience to their customers. The “go-to” example is of course Apple – think of the experience you have when you walk into an Apple store and purchase one of their products. BMW also leverages the experience concept and went as far as embedding the word into its “Ultimate driving experience” tagline!
The temptation always exists to lower prices as a way of building market share and winning more business over your competitors. But is this a good strategy for your business, and for your profession as a whole?
To maintain a successful business and a healthy industry, we need to be profitable. Profits allow us to grow; to invest in our businesses; to hire more people; to pay taxes; and to contribute to the growth of the economy.
However, if we start discounting our prices to win business, we erode our profit margins and are forced to control costs which ultimately impacts the quality of the services we are providing. We leave money on the table at the sacrifice of quality.
Reducing profit margins by competing on price also means we need to attract greater volumes of customers to maintain profitability levels, which necessitates even greater investments in customer facing functions such as sales and marketing.
Taking this one step further, when a large enough number of organisations start competing on price alone, it creates pricing wars; devalues our services; and destabilises the value chain. A rapid downward spiral ensues which impacts the entire industry.
If your entire growth strategy revolves around competing on price you will soon face the infinite loop of cost control, squeezed margins and reduced profits – not to mention the impact on the quality of the services you will deliver to your customers.
The term “value for money” means different things to different people, but ultimately it comes down to the customer’s willingness to trade-off between the three elements of price; suitability; and experience.
Understanding specifically what your customers’ ambitions are and explaining how you can help them solve their problems is how you will deliver a service that the customer will appreciate and be prepared to pay for regardless of their next best (cheaper) option. Ultimately it comes down to having a deep understanding of what the customer’s needs are and the specifics of what they are trying to achieve.
Successful organisations take the time to really understand their customers and know what they are trying to achieve. Taking the time to understand your customers will help you articulate the suitability of your services and demonstrate the experience your customers will have in dealing with you. You will help them recalibrate the trade-off ratio between price, suitability, and experience in your favour.
Choose the types of customers you want to deal with based on your areas of expertise and your ability to help them solve their specific problems. You cannot be “everything to everybody”. Be clear on your value proposition and be steadfast in pursuing customers to whom you can offer genuine value. There will always be bargain hunters who are only interested in price. But be prepared to walk away from those customers who do not align to your “ideal customer” and
avoid the infinite loop.