Competing on Price

Competing primarily on price isn’t a very fun way to run a business.

Unless you’re Walmart. But even then you don’t want to supply pickles to the behemoth.

Just over a year ago I worked for a company that competed solely on price. New employees were hired and given few dollars above minimum wage. Each year benefits were reduced and more restrictions were placed on promotions. We may not be the best at what we did, but no way would anyone undercut our price! 

It was a vicious cycle. A race to the bottom.

The work was technical in nature and not always easy to explain to those who were most in need of our services. Imagine going into a Best Buy and searching for a printer. The number of models and features are overwhelming to many buyers. In that state of confusion, many will select the “safe" option which tends to be the least expensive. I’ll bet the thinking goes something like “If I make a mistake, at least it won’t be an expensive one.”

We were the Walmart of our industry: big and cheap. Our prices were so low that we often had to explain how we stayed in business charging below market rates. A number of customers thought our low rates reflected subpar technical skills and took their business elsewhere.

Seth Godin refers to this as the tyranny of low price.

It’s been just the opposite at at my current employer, Puget Systems.

Instead of competing on price we compete on quality and service. Our goal, starting from the owner on down, is to build the best quality PC we can. Sometimes that means intentionally choosing not to compete at every price point. Take the sub $750 desktop and laptop, products heavily advertised by Dell and HP, for example. We don’t offer a model in the price range, not because we can’t but because doing so would lead to a number of compromises in quality we aren’t willing to make.

What I’ve learned is that companies that compete solely on price seldom give their customers reason to look at anything but the bottom line. Companies such as Walmart, Amazon and even Costco can offer a low price and still survive but only if they grow so large that the massive quantities sold make up for the low margins.

What separates your product or service from the competition besides price?

Comments

  1. I can say that customer service is one. I recently found some shoes for about $30 less on Amazon than on zappos.com. But, then I thought about the amazing customer service experience I had a few months ago with zappos. That experience alone pushed me over the edge to care about which company I bought the shoes from.

    I’ve had similar experiences with Puget, which is one reason I’ve mentioned them to coworkers and friends. Companies that have a genuine care about the experience of the customer is something worth paying for. When they go off of the “flowchart” and really do the best they can to make you feel appreciated, that is when the customer’s brain goes into “rationalization of higher prices” mode.

    The other case where this happens for me is when the company goes out of their way to avoid lock-in – basically sets the customer’s mind at ease that their data will be fully available in the formats they need and not held hostage in any way. This is another item that makes me willing to pay more.

    Lastly, when I buy something, I want to know that I own it, and I am free to use it how I want. So, if I see two devices for sale, and one is unlocked and capable of being hacked to do other things, versus another product that is closed and DRM’d or locked, I’ll opt for the hackable device. The WRT54GL router and the many that exist now capable of running DD-WRT is a great example.

    • Brett Nordquist says:

      FG, thank you for the comment. I’ve also noticed that competing on service or quality allows a company to bring in the type of customers who not only value those traits but tell others. Those who are often searching the absolute lowest price, have very little loyalty and will float to whomever will offer them the best deal.

  2. Great read.
    I felt the same when after reading what Seth wrote.

    Rings true about price vs value and I do hope I never want to race for the bottom myself.

    • Brett Nordquist says:

      Todd, I don’t want to be in that situation again. Once was plenty. One problem is that it’s not easy to recognize you’re in a race to the bottom until it’s too late.

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