Is Your Business Making This Critical Mistake?

As a smaller business, you have lower overheads, lower fixed and variable costs, so you can out price the competition, right?
WRONG
Or at least wrong if you plan on being in business for the long term.
Competing on price might be very temping when you are starting out – you are able to price lower because of the size and scale of your business versus key, and often larger and more established, players in the market.

However, in the long run, this will probably result in business failure. Here’s why:

1. Growth = Higher Cost Base
The reality is, as you grow your business, your cost base will also increase. And you
have created a mindset for yourself and your customers that creates a ceiling for
how you can price your products or services.

Initially this may work for you and generate lead and customers; but these new
customers and sales and revenue will at some point require more costs on your side,
be it people, structures, or systems. This means that you will likely have diminishing
returns as you grow – not an ideal position for any business to be in.

2. Commoditising your Products and Services
You will also probably rely on this lowest cost pricing strategy, which means that you
are commoditising your offering. You have eliminated any value-based
differentiation.

As an easy route out, you probably haven’t researched your customers all that well
and are not attuned to the market, so when change happens, and it will, you will not
be able to adapt to that change and your business will flounder and fail.

3. Devaluing the market
By pulling on your sole lever of pricing, you will potentially erode the value within
the market or segment in which you want to operate.

So that thriving business sector that look for attractive with great revenue forecasts?
The value in that sector will be eroded should there be many low-cost players in that
market, and it will be harder and harder to extract the value you need to from that
market.

4. It’s a Game You Can’t Win
In this negative, downward spiral, the bigger, more established businesses will at
some point notice what you are doing, and they will react once they start losing
customers and revenue. While they have a higher cost base in their businesses, they can comfortably sustain low enough pricing for a long as it takes for you to close
your doors.

So instead of playing a pricing game here’s what you should be doing to avoid business
failure:
 Do your homework: understand what customers want, where and how they want it
and what they will pay
 Define your customer value proposition
 Define the purpose and vision of your business – make it as unique as you are and
just as compelling
 Set up your complete business plan, planning for the long term, including financial
forecasts, marketing, and operations
 Put the basics in place first
 Manage your cash flow
 Set and track milestones and key performance indicators
 Review performance regularly and pivot where necessary
 Review local and global trends for innovation or expansion opportunities
 Create customer loyalty and delight your customers

Sounds like a lot of work, right?
This is why you got into business in the first, to make your dreams a reality so ensure you
operate your business with your future in mind.