Does Price Matter? Every customer wants to feel that they're getting good value and price is part of that equation. In many cases it isn't the most important part but let's not lose sight that it certainly plays a part. How much depends on what additional value you provide… It is your value proposition – not simply your pricing – that determines your competitiveness. So while price does indeed matter, so does value.
There's no such thing as "the cheapest" The obvious question is why does a business that views customer care as it's key differentiator devote so much focus to being cheaper than the competition? The first time we were asked this question we simply shrugged and said: "Because we can". We could just as easily have said: "Because everyone else does", and that would have been a relatively accurate summary of the IT distribution channel. The honest answer in the early days would have been that we didn't see any other reason why anyone should buy from us other than we had the cheapest prices, and that's a trap many of us have fallen into. As we developed as a business, we also grew to understand why customers should buy from us. At the same time we've retained a strong focus on price not just to win business from competitors but to help our customers to compete against aggressive pricing elsewhere. To some extent it has become an extension of our customer care ethos. But even with our focus on price and all the innovative bespoke technology we've thrown at it, our goal is to beat our competitors' prices on the majority of products, and therein lies the great conundrum of price competition: there is no such thing as "the cheapest supplier".
It is impossible to be the cheapest on every product all the time
We saw a great example of this recently. Against a competitor, we were cheaper on over 65% of products and more than 6% cheaper overall. Given that if we'd been cheaper on 50%+ products and matched prices overall we'd still be winning, on this particular day we were giving them an absolute pasting.
But even within that, there was one product that stuck out like a sore thumb. We were 12% more expensive on it. That's more than our margin on that product. Meaning the competitor was selling it cheaper than we'd bought our stock! Despite being way ahead on price comparisons, anyone comparing that particular product on that particular day would have found us expensive.
If nothing else, this demonstrates the goal of being cheapest is unattainable. No matter how good your prices are overall, there will always be someone beating you on something. If your entire focus is on price, you have no way to counter this when it arises.
We're sure many of you have already moved beyond a fixation with price. Now you position your prices to reflect your value to customers. You are priced not just according to the products and services you're selling but to reflect your expertise, service levels, locality and so on.
We recently asked for feedback on the biggest challenges facing small businesses. One of the responses was: "How can we compete with the prices the big guys offer?" This is a specific price issue that we'll look at shortly. But before that, let's restate this slightly to: how can you compete with larger competitors who are selling exactly the same product at a cheaper price?
Perceptions of pricing…
First, let's get some perspective. Naturally, you'll focus more on your "price failures" rather than your "price successes". Customers will often tell you they can buy the same product cheaper elsewhere, and it'll always seems a bit painful when they do. They seldom tell you when your prices are cheaper.
This combination, and our emotional response to what we interpret as criticism, means that you will almost certainly have an exaggerated view of your competitors' price advantage.
To get clarity on where you really stand, we'd strongly advise visiting their store and performing a comprehensive price comparison against a range of products. This will highlight the areas where you "win" comfortably on price and those where you need to enhance your value proposition.
"I can't compete with the big guys…"
Do the big guys have a price advantage? Not necessarily. They will certainly be able to undercut you on some products. Let's take a look at some of the main reasons why…
Buying power: they can buy cheaper simply because of who they are and how much they buy. How much depends on several factors - but regardless it's nowhere near as much as you think. Where they benefit most is through marketing funds and rebates, which are often significant and not usually part of the products price.
Special offers: because of their buying power, they are often offered one-off quantity deals at significant discounts. When this happens they are buying significantly cheaper than you. But these typically involve specific products at specific times, and are usually driven by the manufacturer's desire to hit quarterly targets or to clear slow moving lines
Loss leaders: they promote a product at an unsustainable price simply to attract business, much as supermarkets do with bread and milk. These may or may not be supported via allocation of marketing funds mentioned above
You're doomed, right? Only if you choose to be. Look behind things. Consider their disadvantages… Their standard margin requirement - the margin they need to cover their costs - is much higher than yours. If you're sensible about your margins, you will almost certainly have price advantage across a wide range of your products. Your margins are much more flexible. Some profit is better than none and if something feels like a good deal, you can make it. You may take on a new line with relatively low margin because it will be popular with customers. This means it'll have good turnover and make a healthy contribution to profit. The big guys won't touch it unless it meets their minimum margin criteria. You can make instant product decisions. If you usually stock brand A but brand B suddenly becomes more attractive, you can switch. The big guys can't be so responsive - they have to go through lengthy processes to take on new products. The big guys have huge costs. You may think economies of scale mean their costs are proportionally smaller than yours, but this isn't strictly true. They have all sorts of costs you simply don't because with their size comes a huge burden of administration. The remoteness of senior decision-makers and the multiple levels of management create all kinds of processes and bureaucracy too. And their logistics are significantly more complicated than yours.
This list is not exhaustive, but it should help you feel better about yourselves. Never underestimate the importance of flexibility. The ability to make instant decisions gives you a massive advantage over the big guys, as anyone who's ever worked in a large organisation will testify.
Let's assume we're pretty much on a level playing field overall. The big guys have advantages in buying power and profile, but disadvantages due to inflexibility and high margin requirements
As always, the business advice we give is exactly that, advice! what works for one person may not work for another.