As a mentor for SCORE in Atlanta, Jack Bernard has godfathered hundreds of small businesses over the past four years, and there's one question that owners invariably ask him: What's the best way to market their business?
"There are essentially three variables: price, quality, and service," Bernard says. "Frankly, the worst way to market your business is almost always by price."
It seems counter-intuitive. After all, the aim of a business is to attract and retain paying customers. If your business offers a dramatically lower price than your competitor, it stands to reason that you'll snag more buyers, doesn't it?
Even in these tough economic times, low prices don't automatically translate into a healthy bottom line. In fact, rock-bottom pricing often works against some businesses and can even tarnish their image. What's more, counting on customers to recognize low prices often sets the expectations bar too high. As this "Mind Your Pricing Cues" story from the Harvard Business Review explains, many customers don't know the price of the things they buy and, even when they do, they often lack enough information about competitors' prices to make an informed decision.
Willing to pay for value
It's sensible for big businesses to compete on price, Bernard explains. Because they buy larger quantities of materials and merchandise and have greater economies of scale, they can offer better pricing to the customer. Stores like Wal-Mart and Men's Warehouse are obvious examples in the consumer retail sector. But this same advantage applies equally well in the business-to-business sector.
"I was in group purchasing in the healthcare field for 20 years," Bernard says. "The New York Hospital Association, which is [made up of] all the hospitals in the city, purchased through us because we were larger and could leverage the prices better. But competing on price as a small business is a horrible strategy."
One downside comes from the long-held belief that we get what we pay for. Sure, customers want bargains, but more importantly, they want value. Cutting your price without a sound rationale sends the wrong signal that perhaps your quality is declining or your business is in some kind of trouble. While lower prices can generate quick, much-needed revenue, they can also bruise the reputation of your business over time.
"You've got to be consistent with your brand, and part of your brand is your pricing structure," says Steve Spencer, a SCORE counselor in Ohio. "You've got to determine if you're going to build your business on quality and service for the long-term or if you're just going to be the low-cost provider."
Despite these pitfalls, there are times when it does pay to compete on price.
Distinguish your business with service and quality
For example, when a competitor is in a weakened state, taking advantage of their vulnerable situation by matching or undercutting their prices could enlarge your share of the pie. "If you know your competitor is on the ropes, you can deliver a knockout punch [that drives them] out of the market," Spencer says.
Another time to compete on price is when you want to introduce a new product or service. Such a "get acquainted" offer, where you get customers to sample something at little or no risk, is an established tactic in business—provided you remember it's for a temporary, limited time.
But instead of going head-to-head in a fruitless price war, small businesses that compete on service and quality can distinguish themselves in the eyes of their customers, generate steady revenue, and "own" their space.
Case in point: Bernard had a colleague who sold yeast to major companies. Even though his yeast cost more than the competition, he bested them repeatedly because he gave better service. He delivered yeast around the clock whenever it was needed, whereas the competition took much, much longer to fulfill orders.
"My friend was selling yeast extremely well, even though his price was higher than the competition," Bernard adds. "You can always go back and compete on price if you establish service and quality. You're going to have a much better reputation and a better profit margin."
Standing firm on price and doubling sales volume
Service and quality are two things that Jessica Johnson knows all about. As the vice president of the Bronx, New York-based Johnson Security Bureau, which provides professional guard services throughout the New York metropolitan area, she and her brother are third-generation operators of their 50-year-old family-owned business.
"We've seen a lot of competitors come and go," she says. "If you lower your prices, it may win some short-term successes. But in the long-run, you're selling yourself short. It's hard to recover from that type of strategy."
Taking a cue from Spencer and Bernard, Johnson eschews slashing prices and opts instead for competing on more intangible qualities. For example, she peppers new clients with questions to uncover their exact needs and concerns.
"I've had clients tell me that price is an issue," she says. "But if you ask enough questions, you'll understand that price is generally not the only issue."
Sometimes she'll do an assessment of a client's situation to see if there are security threats that they're not paying attention to. Then she'll provide information on how to handle them.
"That's not something we built into the price of the guard services, but it's a way that we can differentiate the service we provide," she explains. "It also opens the door for us to have an ongoing dialogue. Then, [we can] ask those questions at another point that can help us get more business."
The strategy is paying off. According to Johnson, they've doubled the number of their employees and sales every year from 2009 through 2011.
"The marketplace needs small business to be competitive," she emphasizes. "It's where the majority of new jobs are created. So we have a responsibility as small business owners to not sell ourselves short and to appropriately price our products and services."
Thumb_PriceNoObject.jpg 32.7 K