Innovative Alternatives to Price Cuts

Most businesses are created to take advantage of some kind of benefit or need the founders have identified in the market. They see a problem, create a way to offer a solution and—presto!—a business is born. Customers are so happy to have their problems solved they pay a healthy price for the new products or services.

Gross profit margins usually start out looking rosy. The challenge comes as the business grows. Unless there are barriers in the market that prevent competition, other companies see what this bright young startup is doing and copy it. Now customers can pick among options and suddenly price becomes an issue. Should a business cut prices to stay ahead of the competition?

The answer isn’t as simple as it might seem. Certainly, vying for customers on price is an effective way to run a business. However, any business that successfully stays ahead of the competition by offering lower prices is operating with a commodity-based business model. This business model is all about more volume at lower costs.

A business owner facing price pressure should pause and make sure his or her long-term strategy is in line with operating in a commodity business model before dropping prices. If new competition creates pricing pressure and the business drops prices to maintain or grow market share, the business is choosing to create an advantage with price. That’s fine, but now the business must focus on consistently growing volume and reducing costs to maintain that advantage. The business strategy is to get bigger and bigger all the time while also becoming more and more efficient. It’s a commodity game.

So what’s another option? Say you want to remain unique in the market, have no aspirations of becoming a multinational presence and like the fact that people pay a little more for your products. Instead of giving in to price pressure, innovate.

Consider the iPhone. At its launch, it was new and innovative in the market. People paid $299 to gain access to new applications and the cool touch screen. They hardly gave it a second thought. It only took a few months before the market was full of smartphones comparable to the iPhone in features and price. So what did Apple do? The company raised the bar. And in the process, raised the price. Apple focused on innovation and offering a better product, rather than trying to compete on price as new offerings flooded the market. That takes guts.

Businesses that operate on a niche business model stay ahead by offering new, unique, and creative options for their customers, not lower prices. While commodity business must focus on providing more for less, niche businesses must deliver something beyond customer expectations. This takes adaptation, deep understanding of the target customer’s needs, and dedication to constant improvement.

Operating a niche business model isn’t always easy or intuitive. But for many passionate business owners, the challenge of leading the market with a better product or service is motivating and exciting. Helping businesses stay ahead of the completion without dissolving their unique identity into a commodity model is one of the ways we love to help organizations thrive.