Businesswise | Why Being the Cheapest Is Bad for Business
There is a saying in Jamaica: 'Anyting too cheap neva good' - if it is too cheap, it is not good.
In my experience, there's more than a ring of truth to that saying, especially when it comes to how one operates a business.
I usually advise business owners not to aim to be the cheapest or lowest cost provider of goods and services. Competing on price is a business strategy that is unattractive, often unsustainable and offers no real competitive advantage.
Let me explain: When you focus exclusively on price, any business can easily undercut you, especially in the short term, to compete aggressively and capture your customers.
Granted, our Fair Competition Act of 1993 expressly prohibits predatory pricing in which "a dominant firm temporarily charges particularly low prices in an attempt to eliminate existing competitors", as this is known to be disadvantageous to competing businesses and the consumers in the long run. However, there's a long stretch between slashing prices to edge out your competitor and predatory practices.
Another concern is that it is very difficult to build loyalty among consumers who are driven solely by how low the prices can go. They will constantly search for better deals and switch to the competitor if it is even slightly cheaper, regardless of quality.
Businesses should always strive to build a loyal customer base that will bring consistent and growing revenues which can also reduce customer acquisition spend, as well as advertising and promotions costs.
Striving for the lowest prices typically necessitates operating on razor-thin margins, with little room to manoeuvre, which may compromise quality and service. This strategy can also reduce or wipe out profitability and make you more vulnerable to external shocks.
Last, but by no means least, is the likely impact on your company's brand. Cheapness has a negative connotation and is usually associated with inferiority. Consumers will understandably view the lowest-priced companies as being low quality and will search for better alternatives once they can afford it.
While I've outlined why I view competing on price as a race to the bottom of the enterprise barrel, it does not mean that price is not important. It is essential to be competitive. However, the ideal scenario is one in which you can command higher prices for your goods or services so that your customers will spend more and come back time and time again.
The ultimate question that perplexes many small business owners is how to get customers to spend more and be able to compete outside of price.
The key is consistently creating and delivering real value that customers will appreciate. Consistency is paramount as your ability to deliver the same quality all the time will ultimately determine your brand and success. For example, I recently learnt of a young farmer, Fitzroy Mais, who grows strawberries locally. Although the price at which he sells them is a bit more than the typical imports, I had no difficulty paying more because of the value that he offers, such as:
1. Fruit grown in Jamaica, which means I'm supporting local production, jobs and families.
2. They are fresh and last longer than the imported ones.
3. Bigger and sweeter strawberries than most local ones I've tried.
4. They are free from preservatives and harmful pesticides.
5. He delivers in Kingston at no additional cost.
6. He's consistent and reliable; and
7. He's affable and a pleasure to do business with.
Incidentally, I posted a picture of Fitzroy, his young daughter who inspired him to start his business, and his fresh Jamaican-grown strawberries on my social media pages and it went viral. Thousands of persons liked and shared the photo with his contact details. He acquired so many new customers that he has been forced to expand production and has hired more people to work at his small farm.
Customers have bought into his value, are enchanted by his story, and are willing to pay more.
When last we spoke I asked: "What's up, Fitzroy?"
His response: "Demand."
Now, that's music to any entrepreneur's ears.
Yaneek Page is an entrepreneur and trainer, and creator/executive producer of The Innovators TV series.