Why Competing on Price Kills Your Small Business

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"Hey dawg: If we build the best computers at the cheapest prices, we win."

"Then, we'll beat Dell and be super-duper-wealthy."

Or so we thought when we first started Trizzy. Back in the day, we thought of this sweet idea: we'll order computer parts from NewEgg, assemble those suckers, and sell them on the cheap. The problem? We'd profit a rockin' $20 per computer sold. Sad. As were our mamas about our hopes.

Competing against Dell on prices? Fuhgettaboutit.

If you're a start-up looking to build your next Fortune 500 empire, don't compete on prices. You can if you land on the Fortune 500 list -- or king of your industry; otherwise, you're wasting your time trying to compete on something that will bankrupt your business. Here's why you can't compete on price:
  1. Bigger competitors will kill you.

    Peep this scenario: The neighborhood mom-and-pop shop pays a decent $2 per brush with its supplier. Goliath Walmart comes to town. It's the typical multi-billion dollar company that can account for a humongous chunk of the supplier's bottom line, indirectly pay for its health-care, send top performers to Hawaii, and provide the supplier with 85174310531342 jobs. All they're asking: $1.50 per toothbrush. If you're the supplier, you'd be pretty clumsy if you didn't take the offer. And folks, that's why smaller guys must compete beyond price wars.
  2. You're targeting price-conscious consumers.

    What do you get when you target these customers? People who switch on a dime when they see a lower-cost competitor. People who don't value your service. People who squeeze every cent out of your profits. These are your worst customers. Their loyalty to your business sucks. Just ask Gateway. Or, 1990s K-mart. If Sofa-4-Cheap contacts your customer tomorrow, you've lost that customer's business -- and worse: that customer's personal network of potential customers.
  3. You lessen your product's value.

    A car that goes by the name "Veyron" sells for a good $1,300,000. Say you've won a prize between choosing that expensive mother-sucker, or an $18,000 Toyota Camry -- which:
    1. is more reliable
    2. cheaper to repair
    3. has higher gas mileage
    4. more affordable insurance
    5. probably won't be stolen

    One condition on the prize: you can't sell the car you choose. Unless you're a car enthusiast, you know nothing about the Veyron. For all you know, it could very well be an expensive Pinto.

    Knowing that much, which would you choose?

    The rational decision is to choose the Camry since it functions better. But, humans don't act on rationality. We act on emotions. Unless you're drugged on something, most of us would take the $1.3 million car. We know nothing about it. Just its price. And, that gave us a sweet clue to how much that car rocks the bejeebus out of our grandmothers' Dodge Neons. When something's priced higher, customers place a higher value on the sucker.
You're a peanut to the Goliaths. You provide a personal service. Good customers will pay a premium for it. So, charge that premium. One caveat: Be genuine about your prices. Take it from our man, Warren Buffett:

It takes 20 years to build a reputation and five minutes to ruin it.

A rockin' template for ya:

"We will not compete on prices."

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Posted on July 24

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