You should not compete on cost. That is a losing game. There will always be a new competitor who will undercut the competition's price, trying to buy their way into business.
Instead, you need to differentiate your products and services. Give your prospects and customers a reason to pay more for your products and services. For example, there is a reason that people pay almost double the price for a Mercedes Benz vs. a Kia.
Differentiating your business is not as easy as simply cutting prices, but it's a much healthier long-term strategy.
Barky is absolutely correct that you need to differentiate your business. This doesn't just mean having a catchy name or tagline, however, you also need to offer exemplary customer service and/or products (depending on your business, of course!). I offer bookkeeping services and my rates are at the middle of the industry standard. My customer service, however, is better than most and I make a point of being involved in various forums and trying to provide useful/helpful advice to others in my industry, my target market, and other entrepreneurs and startups. This puts me 'above the crowd' and helps me stand out from the large group of businesses that offer the same services that I do.
The Virtual Office Goddess, LLC
"Why hire a mere mortal when you have access to a Goddess?"
*grin - see what I mean? - folks remember both my company name and tagline, but what they really remember is that I assist others with no direct benefit to me*
Great advice from both of you! And Office Goddess, I absolutely LOVE your tagline there! It makes me smile, puts me at ease, tells me you have a sense of humour AND that you are confident in your abilities which would definitely put you on the top of my list were I looking for a bookkeeper.
crispin, as Barky and Goddess have said, you need to give the consumer a reason to spend just a little more for better quality. And honestly, if the consumer isn't willing to pay more for better quality, they are merely bargain hunters and not concerned with customer service or quality now nor will they ever be. Those types of customers won't benefit you in the long run as they will not be loyal to your business. Build trust and loyalty with people who know that a true bargain is consistently getting the best product and service they can from an involved and knowledgeable supplier and who will remain loyal to those values and concepts.
Best of luck to you!
I agree that you'll want to differentiate your products and services, but would additionally suggest that you start by differentiating your market.
What do buyers of those products or services want (or need) that the low-cost providers aren't offering? When answering that, try not to think about the normal consumers (after all, the way all those low-cost providers got to be the low-cost providers is by selling lots and lots of stuff to normal customers). Think instead of the "Abby Normal" customers -- the people on the "fringes" -- what do they want?
Offering the things that they want or need may not be that easy or convenient for you initially (if it were, the other providers would be doing it already). Yet when you make a commitment to serve a specific market segment the way those people want to be served (and in a way that no one else is willing to bother with), you can win and keep their business. Plus, they are great at spreading the word when they find something that uniquely satisfies their needs and expectations.
Hope that helps. Best wishes.