Competing On Price - Danger of Being Undercut

At the weekend I walked through a shopping centre in Birmingham where I rarely go.

While there, the danger of competing on price and positioning your business as the lowest priced offering was price was reinforced to me.

Someone can always come along and undercut your prices.

There is quite a large retail chain in the UK called Poundland which sells everything in the store for £1.

Its positioning is clear. It is "cheap and cheerful", "pile it high, sell it quick."

Not my kind of shop at all which is why I don't usually pay much attention.

But a few stores down I found a Poundland imitation - selling everything in the shop for 99p or less.

Then to my amazement, I almost immediately found another Poundland imitator but this time selling everything for 98p or less.

It's only a penny here and a penny there but it does show what happens when you just compete on price.

Almost inevitably someone else can come along, shave their margins a little bit more and undercut you.

A low price strategy only works if you are the lowest cost supplier but to make it stick, you probably need a 10 to 15% cost advantage. Much less and your competitors are still going to be nipping at your feet, all justified through the logic of marginal pricing.

It was Michael Porter back in 1980 who identified three generic strategies:

1. The lowest cost strategy - your aim is to be the lowest cost producer/supplier.
      
2. A differentiation strategy  - your aim is to be clearly differentiated from the mainstream in a way that adds value to customers who are then willing to pay more for your particular product.
    
3. A focused strategy  - you target a particular niche (which is really a sub-strategy of the first two) by being a specialist, either offering a uniquely differentiated product or a low cost product where all the unnecessary and unwanted bells & whistles have been removed.

I have a lot of time for Michael Porter and find this model a very useful framework although it has become quite common to criticise it because Michael Porter warned of the dangers of trying to be differentiated and the lowest cost producer.

The almost inevitable result is that you get "stuck in the middle", neither one thing or the other and finish up making inconsistent compromises.

As Michael Porter himself pointed out it is possible to be able to pursue both a lowest cost strategy and a differentiation strategy but very special conditions have to apply.

You either have to have some unique proprietary resource advantage that gives you lower costs, an innovation that you can effectively protect through patents and trade marks or you have a bunch of competitors who are stuck in the middle and making a bad set of decisions.

Value For Money

In my experience it is a mistake to think that people buy on price.

They like to think that they do and you may be one of them.

But how many things can you say that you have bought because they were the absolute cheapest you could find.

Just take a look at the clothes you are wearing now.

Were they the cheapest or did you make some kind of value for money assessment?

Customer value is a fascinating subject and one that I intend to blog about frequently.

Just like beauty, value is in the eye of the beholder.

If you can find out what it is that your customers value most and provide it to them economically (that's your cost, not your selling price), you will be protected from these cut-price merchants who shave a penny off here and there.