6 Strategies for Avoiding the 'Race to the Bottom' Price War You Don't Want to Win
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RFP. If you're an entrepreneur who ever has to go to tender with your product or service -- those three little letters can raise your blood pressure and unleash a barrage of expletives. Why? Inherently, we know that a high percentage of the time, Requests For Pricing (or Proposal) are often decided by the lowest cost provider. Of course, this is not always the case, as several variables may influence the decision, but you get the point.
While there may be subtle curve balls we can throw to change the decision-making criterion in a call for multiple providers, there are simpler ways we can avoid entering that rat race altogether.
The first lesson for many entrepreneurs is that not all customers are created equally. Just as a larger organization might identify their decision-making criterion when selecting a vendor, an individual consumer subconsciously is juggling several variables when deciding whether or not to buy from you.
Knowing that the price tag is also being weighed in their minds against quality, durability and other factors, businesses can learn to position their offering in a way that avoids a single variable (price) decision on behalf of the buyer. This can be done in several unique ways.
Home entertainment companies may sell televisions and home theaters (which can be compared apples to apples with other companies), but they can also sell installation services, an extended warrantee and integration solutions based on the internet of things (IOT) that transform the way consumers might enjoy their products.
The automotive industry is a highly competitive one. Each of the major companies in a particular customer segment offers comparable products (ask anyone with a truck, "Ford or Chevy?" and you will start a debate!), with subtle differences they hope to capitalize on. Ford is known for their technology, Volvo for safety, Audi for luxury performance, and so on. They will all get you from point A to B which is the function of an automobile, but they each try to position their mode of transportation in a very different way.
Rather than having to be either a "high end provider" or a "low cost alternative," what about changing the structure of the price? Think of the massage industry. You can pay upwards of $150 for a one-hour massage in a tranquil spa, or you can find a massage for $60 or less an hour in a rough part of town where you might need to clarify the scope of services being offered! A third direction might be a 'massage membership' where a monthly fee covers a monthly or weekly massage, and clients start to look at their massages as a part of their total health solution rather than a dollar per hour decision.
Changing the way your customers buy, or how they receive your products, can drastically change your business. Where do you buy your groceries? Do you go to a 100,000-square-foot warehouse superstore to save money, or do you go to local market to get as close to "farm to table" as possible, knowing you're paying more for lemons, honey and bread in exchange for knowing its source? What if there was a third direction -- having your groceries delivered? Now you're not comparing the price per lemon, you are placing a value on the convenience of shopping online and having your groceries come to your doorstep.
Just as the famous ink blot test is used to understand how certain patients think, powerful marketing campaigns evoke emotion into the purchase decision so that potential buyers feel strongly about their products compared to others. In Simon Sinek's famous TED talk, he demonstrates this beautifully when comparing Dell computers and Apple in the way they market to their customers.
If each of the above can change the purchase decision, imagine coupling two or more strategies? Using that grocer example, charging a monthly membership for delivery of differentiated (organic or locally farmed, for example) products combines three different potential value propositions to create a very different experience and value for the end user than couponing at grocery store A or B.
In summary, companies today need to be different on purpose, or they get bunched in with everybody else, and the one variable that every consumer understands when having to decide between too many similar choices? Price.
Want to avoid a "race to the bottom" where providers perpetually must lower their prices? Be different, then price differently.