Competing on Price: Right, Wrong or Inevitable?

We received a number of follow-up contacts following our National Seminar Series for the Australian Institute of Architects, some with a similar theme. We spoke during the seminars about the dangers of competing on price to be told more than once that the failure to have the lowest price meant losing the business. Then during our usual reading to keep up with the best business thoughts and ideas, we came across a really good blog post by Ted Coine called 12 most irrefutable laws of business heresy. Not only is the blog post good, but the comments feature a passionate statement by John Feskorn about the same "competing on price" viewpoint that we had heard regularly. As a result, Ted Coine did a follow-up post on his Catalyst site which deals with some of the issues involved, but we thought we would chime in with some thoughts.

If you don't want to read this whole post, the key theme is that in one way or another, price will always be part of your competitive offering. What is important for long-term success is how you define the role price plays. It needs to be the best role for your business, in line with the shared values between yourself and your customers.

Traditional Management Approaches

During the 20th century (and beyond) the traditional approaches to running a business required the answer to three key questions: What are we going to sell; Who will our customers be; and how do we beat or avoid the competition.

While the first two questions had a variety of answers, the third question was constantly being answered in one of two ways:

• We will beat them on Price
• We will beat them on Quality

The people we were dealing with, customers, were reduced to 2 dimensional beings who either wanted to save money or insist on top quality. Of course, all of the competitors came up with the same answers because business planning had the same formulas. As a result, many businesses were left vulnerable to competition or substitution.

The Inevitable Consequences of Competing on Price

There are certain inevitable consequences that come from competing on price as your major, or even sole, competitive advantage.

You struggle to retain motivation - Who exactly is motivated by supplying the cheapest? It happens and there are some people who are motivated that way, especially those trying to support or improve the "lifestyles" of the poor and disadvantaged. There are still other markets where it happens, but they are becoming rarer and it is much more difficult to create sustainable businesses in them. However, usually "being the cheapest" is not one of our values, and nor do we share it with many customers. When our business values don't align with the personal values of ourselves and our customers, it becomes very difficult to operate successfully and with passion.

You will lose a phenomenal amount of business - The number 1 price based retailer in the world loses a phenomenal amount of business to Nos 2, 3, 4 ... and to the many small, medium and other competitors out there. Competing on price should be about the business you win, not the business you lose but because of the small margins and the need for volume, your focus shifts to the business you lose. Actually it doesn't matter what your competitive advantage is, you will still lose a phenomenal amount of business but the way you think about this and the way you plan your business is vastly different.

Size matters - Competing on price suits the massive (economies of scale) and the tiny (low overheads). Unfortunately if you are successful, you will not stay tiny and will start to lose much of your advantage as you grow. If you grow to any reasonable size at all, you can expect the massive to come running to take advantage of all the market creation work you've done and snuff out the remaining part of your advantage. Which means that becoming massive (unless you create a brand new market) is exceptionally difficult ... and do you want that for your business and your lifestyle?

Competing on Price becomes Competing on Cost - this results in your business becoming more inward looking, process orientated and product-focused, and less innovative and focused on customers. While this creates another vulnerability to competition, it creates major vulnerabilities to substitution and disruptive innovation.

You lose the ability to create relationships for your business - relationships are important at any time, but even more so when you find yourself in times of trouble or difficulty. As a price driven business, these times will come and you will not have the relationship base that makes it easier to operate in short-term survival mode. In the long-term, relationships are the foundations for your reputation, brand development and your most credible communication, fundamental to creating your sustainable business. Very few long-term relationships are built on price.

You believe every time you lose, it is because of price - it's amazing how often this assumption is made. It can be a convenient excuse for choosing a competitor, and it saves the customer long and difficult explanations. If you are being compared to your competitors on the basis of price, you have also failed to distinguish yourself from those competitors through any building of trust or relationships, or service promises or quality features. So you haven't always just lost because of price.

The 21st Century Business

The experience of the 20th century highlighted the difficulties of operating for long-term success using traditional business planning. The modern business is using a different starting point:

• An organisation is a group of people with shared values, who share an issue (problem, opportunity) and who work together to provide a solution for all who are affected by the same issue
• Issue + Solution = Vision
• Vision for All = Value proposition

In this scenario, the customers share the organisation's values and become part of the "group of people" and the basis for the business is the value proposition built from this foundation.

What you will do is create a business that focuses on delighting the customers and where you have a number of touchpoints with them, including:

• The experiences the product/service creates for the customer
• The experiences of the actual provision of the product/service
• The value the customer receives, which can be seen in the Value Proposition diagram to include price plus their value add, just as our price includes costs plus our value add
• Customer service and employee enjoyment, which are very strongly linked
• The development of trust and relationships

You are still never going to establish a business that wins 100% of the available business (and if you do, certain anti-trust and monopoly investigators will descend upon you with glee!). However you will no longer be driven by the "losing business" approach.

Thinking this way does make a difference

When you plan and establish your business on this basis, the way that you think changes. A couple of examples include:

• Rather than holding your first customer meeting at their place or on site or in your office, how about holding it at a place where you have already completed work, so your customer can see and touch your work, increasing trust and credibility. If you get lucky, you may even have a satisfied client to speak on your behalf.
• When asked for a quote, provide exactly what is quoted, but also demonstrate your expertise by providing three or four options, especially if you're not that keen on the client approach and believe it can be done better. Always provide what the client wants, and then demonstrate that you add value by ... adding value!

Yes, these are two specific examples that will only suit some businesses, but they are illustrations of how the different approach to your business creates different ways of building competitive advantages.

The Big Conclusion

So what do we conclude from all of this?

• There is no one right answer that suits every person who runs a business, or every customer, or every business. You need to find your way.
• Competing solely or predominately on price is difficult, not impossible. It may not be the best way to run your business, or your own life, and in fact it will rarely provide a path to long-term sustainable success. However, if that is one of the values you believe you share with your clients, then so be it.
• Regardless of which path you choose, you are always going to lose business based on price. In fact you are always going to lose business based on many factors. We don't win 100% of the available business.
• Like all of you, we have lost our fair share of business on price ... but the business we have won has been great, exciting, challenging and has included some really good relationships, adding that much more pleasure to our work.

Price will always be a factor. Even at the upper end of the market, price still remains a factor, it is just considered in a different way. So in a way, competing on price is inevitable - it's all a matter of approach and degree.