Don't get stuck slashing prices. Instead, use this consumer-behavior secret to reframe the competition.
Price wars stink. There's nothing more frustrating than being constantly forced to lower your price simply in order to make a sale.
Wouldn't it be great if you could keep your price higher than the competition while actually increasing sales?
It turns out there's a very simple way to do this--by turning your competitor's lower price into a competitive disadvantage.
It turns out that when two products are virtually identical, people will buy the one that costs less. However, if buyers are exposed to a third product that costs more than either of the original two, people will usually pick the mid-priced product, rather than the cheapest one.
Create Another Price Point
Here's how to use this fact strategically.
Let's suppose you're selling a service for $1,000 that's similar to a service that your competitor is selling for $900. You could offer your service for $890, but that's just playing the price war game.
Instead, offer three versions of your service: one for $900, one for $1,000 and one for $1,200. The three services don't have to be wildly different as long as you label them appropriately--say, Silver, Gold, and Platinum packages.
Then, if a customer or prospect brings up your competitor's product, you point out that your "Silver" package matches their price. Bingo! You've just positioned the competitor as the cheapie alternative.
In most cases, the customer will mentally take the competitor off their list and want either your Gold or (if they're that kind of person) your Platinum level.
Know Your Customer
Needless to say, this is best for customers who are not doing a huge amount of research into your product category. For those who are, you'll need to go a more difficult route--identifying something in your product that is so important that the alternatives just aren't viable.
Still, when it comes to competitive pricing, this is about is close to a magic bullet as it comes.