A "price war" - where companies actively compete to undercut the competition even at the expense of their own profits - is something every business needs to plan ahead for. Large companies can often afford slimmer product margins if it means capturing market share - something small businesses can rarely match.
The other big issue with entering into a price war is it ultimately harms every business involved in the industry. If one firm cuts its prices and others respond by also lowering them as well, this tit-for-tat exchange can quickly escalate to an unsustainable point.
If you look around at many of the products that have seen dramatic cuts in price, they will likely have been the result of a price war. Flat-screen televisions are a great example - where costs have dropped considerably in the last 10 years and companies are now competing with razor-thin profit margins.
The best advice when you see signs of a price war emerging is not to get involved in the first place. While that can seem difficult if price is a key part of your comparative advantage, choosing not to be entangled in a price war is an easy way to keep your business sustainable in the long-run.
So how can you remain competitive without entering into a price war? Here are four strategies that can help a business appeal to customers without resorting to lower costs.
1) Define your target market
Any price war is a race to the bottom, which also means that, even if you win, your brand image in terms of quality is going to be lower than before the price war started and will only be picking up price-sensitive clients. Instead, companies need to target their efforts towards sections of the market where buyers are more interested in quality than price.
This means pursuing the middle and high sectors of the market - segments that will be placing a premium on quality. Once you've identified where this target market sits, focus your efforts on these buyers by developing high-quality products and comprehensive support to back it up.
While middle- and high-value customers will be smaller in number than the lower tier of the market, these customers are going to be least swayed by lower prices, especially if they come at the expense of quality.
2) Address the issues your customers are facing
Many companies make the mistake of focusing their marketing efforts on the features a product offers, rather than actually addressing the issues a client is facing.
While this is a common mistake, there is an easy solution. Instead of simply stating the benefits of your goods and services, focus on the customer's needs and then position your products as the solution to their problems.
Doing this requires a small-business owner to stop and take the time to think about the issues their target market is encountering and how their product addresses these. From there, it becomes much easier to encourage people to invest in your offering.
If a company can consistently and effectively target their customer's needs, it also becomes more likely they will return and make subsequent purchases. Having this pool of loyal customers who understand the value your business provides is another strong way to avoid a potential price war in your industry.
3) Brand your product effectively
Once you have a target market that is more concerned with quality than price and have identified the selling points that will make them invest in your products, the next step is to brand your products in the right way.
To do this, you need to build a story around your products and services - one that resonates with those issues you have identified among your ideal customers. You then need to build this story into every stage of the relationship you have with clients, from the packaging of your products through to after-sale support. Every step has to be clearly aligned with the overall branding of your business.
While this might seem like a lot of work for a busy small business, there are considerable rewards for companies that can keep their branding consistent - including the ability to avoid an expensive price war.
4) Stand by the quality of your offering
Every business owner believes in the quality of the goods and services they offer - the challenge is to then communicate this confidence to your clientele. This process starts with branding, but there are many other strategies that can help a company to stand out from the rest.
Offering a free trial or a money-back guarantee can make it clear you stand behind your product and that it will meet the needs of your clients. While these might result in a slight increase in costs for your product, the intangible benefits that come from this offering can ensure your business keeps attracting new customers.
If a price war has been triggered by poor economic conditions or weak demand, a free trial can also help, as it can give clients a taste of the products or services you offer without requiring them to commit to your service. Once you have built that trust, converting them into a paying customer is much easier.
By combining these four steps, your business can find itself on the surest footing to avoid a potential price war with competitors. By maximising each of these strategies, it won't be long before your business is competing on the quality of your goods and services, rather than struggling to offer the lowest price possible.