How to counter predatory pricing
3-minute read
In many industries, larger companies will use a pricing strategy known as "predatory pricing" where they drop their prices to eliminate smaller companies and grab more market share.
But this technique leads only one way. When companies begin price cutting, the marketplace rapidly converts to a commodity market where the only real differentiator is price. Essentially, the lowest price rules.
It is unlikely that you can compete against larger companies on price alone. They simply have more resources and can outlast you. When the competition is eliminated, prices will probably go up again.
Use a judo strategy
But you can still fight back with a judo strategy. Use your opponents’ strengths against them, keeping them constantly off balance through your agility, creativity and ability to be flexible.
Generally, larger competitors can compete on low pricing because they use systems that serve a mass market and therefore cut out many niche buyers.
Differentiate to maintain higher prices
Your job is to differentiate yourself by finding the problems within that system and solving them. Determine what buyers’ pain points are, and find a way to relieve that pain.
You’ll also want to weed out those buyers who care only about price, and concentrate on those who want more.
This might require an outside view of your business by a consultant or other advisor.
Here are six tips to differentiate your business and set higher margins.
1. Survey potential buyers
Start by asking potential buyers what they would like to see, but also give them some choices. Some people will be quite sure of what they want from your business, but others will only tell you what they already know. So prompt them with choices and questions, such as, "Would you be willing to pay extra for this?"
2. Create a compelling value proposition
Next, clearly determine why people should buy from you instead of somebody else and make that the centre of your sales and marketing pitch. Usually this value proposition addresses some problem clients are facing, a problem you will happily resolve.
3. Establish an identity
Use branding to stand out from your competitors. For example, workers from a home window-washing firm could differentiate themselves from competitors by always showing up in kilts.
See how you could spruce up your image to portray extreme professionalism and reflect your unique culture.
These techniques are unlikely to make a quick dent in your opponent's hold on the market, but in combination they will over time make you stand out as a quality supplier of services.
4. Establish tiered service packages
It’s often a good idea to use low prices to draw in customers and then offer them higher-priced premium services to turn a profit.
A trucking company, for instance, might offer regular trucking at a lower price, but also create a higher-priced premium service for buyers who need faster delivery times or specialized service.
5. Offer a guarantee
Consider creating a promise that you will deliver something by a certain time or you will cut the price. Be careful, however. You do not want to offer something you can't do.
6. Be innovative
Small businesses are often able to bring new products and services to market much faster than their larger competitors. So be nimble. Find innovative ways to improve your service. Then tell everyone about it.