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If you’ve long thought that the best way to differentiate your small business from its competitors is to offer customers the lowest prices, well, you might want to think again.
At least, that’s the word from two in-the-know experts—business coach Pamela Bruner and Becky McCray, an author, speaker, and co-owner of a liquor store and a cattle ranch—both of whom suggest that lowballing usually isn’t the best strategy for success-minded businesses of any size.
“In a race to the bottom, you usually lose,” says Bruner, who adds that, at best, such efforts end up attracting “bargain-basement customers, which are not usually what you want.” They tend to be less loyal to your business.
McCray’s advice on the competition is, “don't underprice them, over-deliver them.” She adds that one of the many lessons her 20 years of entrepreneurial experience has taught her is that “trying to compete by undercutting prices is a losing proposition.”
The only exception McCray can envision: “If the competition you are trying to come in under is at the top end of the market, and you just want to slide into the slightly-less-expensive position, that can be a fine place to be. But you have to over-deliver on service to make it work.”
RELATED: Does a Discount Pricing Strategy Make Sense for Small Business?
Of course, finding the “sweet spot” when it comes to pricing your business’ goods or services can be easier said than done. “Big business may have a fleet of MBAs to analyze the perfect pricing point, but small business ends up making a wild guess,” admits McCray. “Then that guess becomes something you just have to live with.”
That’s because it isn’t easy for a business to alter its prices. “It's tough to adjust customers' thinking to your new prices,” she says, “and it's tough to make yourself make a major change like a pricing overhaul.”
If you're going to try to fight on price,
make sure you have the numbers
that let you make smart decisions.
Another of McCray’s suggestions related to pricing: It pays to know industry benchmarks. “Your retail segment has an average or benchmark of pricing, she says, which can be found by using the industry averages for gross margin, available at http://www.retailowner.com/Benchmarks.aspx.
“Knowing the gross margin lets you figure the average cost paid for merchandise and the usual amount of markup on items,” McCray explains. “If you don't know those numbers, don't even try to engage in a pricing battle.”
It also pays to have excellent financial records, she adds. McCray shares the story of a small business owner who sells pricey farm storage bins. “He always wanted to make people a deal, give them a discount. At the same time, he kept a very messy office. By the time we got everything in order, he could see what each storage bin actually cost him to manufacture. Suddenly, he was less interested in giving every farmer a discount.”
The moral of that particular story, according to McCray: “If you're going to try to fight on price, make sure you have the numbers that let you make smart decisions.”
RELATED: 3 Strategies to Determine Product Markup
Regardless of whether you decide to take the high or load road in terms of pricing, both Bruner and McCray suggest you not focus soley on that aspect of your business.
Focusing on pricing alone “is a very poor way to try to make your business successful,” stresses McCray. Instead, think of pricing as “just one of the tools. Think about your appearance, your service, your selection, your willingness to customize, your knowledge of the product, your connection to the community.”
“Pricing is just a piece of the puzzle,” adds Bruner. “You also need marketing, a clear and strong message, great sales skills” and more.
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