Wednesday, August 18, 2004

Old school business lesson: Don't compete on price!

Well, this question comes up again and again. Someone posted on that he was sick of people selling their services so cheaply. This comes up very often, and every time, the opinion comes from someone unfamiliar with business economics and the basic principles of capitalism.

My reply was this:

Time for old-school business lesson!

Competition inevitably leads to lower prices.

Read the above sentence again. Seven times.

To counter this, you should, as a small business consultant, NOT compete on price. Ever. It will be your demise. You will always be crushed sooner or later. Always, always, always compete with other things than price. It’s one of the most basic business principles that you need something that sets you apart from your competitors. This advantage should be as close to unique as possible, make you as different as possible, and be EXTREMELY hard to duplicate. That last part is the most important one, since your advantage can be rendered useless over a night otherwise.

If I start telling you what advantages you should use, this will turn into a specific business philosophy and not an explanation of fundamental business principles, but I’ll give you a few examples…

Your customer service can be fantastic
By “fantastic”, I don’t mean “good”. I mean blow-people-out-of-the-water fantastic. So fantastic that your clients step back and say “Wow, I can’t believe they did that”, when you give them a new suit for free after they have had their old one shredded by accident. If you think this is easy to duplicate, think about the customer service of the last 10 companies you dealt with.

Your product can be of superior quality
Same thing here – it has to be MUCH better than your other competitors. Not only the product/service itself, but also the packaging, delivery and overall presentation of it. Everything about it has to ooze quality. If you’ve ever had an Apple Macintosh delivered to you, you know exactly what I’m talking about here.

There are much more possible ways to separate you from the pack, such as location or niche expertise (such as focusing ONLY to travel agencies). They are all good, as long they really clearly separate you from your (cheaper) competitors.

Make sure it is hard for your competitors to duplicate. If you are competing a lot with companies on the Internet or in India, counter that by visiting your clients in person and by having your offices in the client home town. If teenagers steal a lot of business from you, send your clients wine, be professional as hell, have a real office, and do stuff that teenagers simply cannot do for the client. If your competitors are cheap, send your customers gifts and use expensive binders.

In summary, be different from your competitors, and do it in a way that they cannot duplicate easily.