How to Avoid the Price-War Trap
My husband and I started a business that makes and installs customized sheds. Our plan was to offer better service and higher quality than our competitors. When we noticed we were losing jobs because of our higher prices, we decided to reduce them. Since then, we've attracted customers who seem to care only about how cheaply they can get the work done. How can we decide whether the additional business is worth it?
—Sarah Rabenberg, co-owner, Central California Sheds, Modesto, California
I never like the idea of reducing prices because of competitive pressure from lower-quality producers. Not only will you lose margin in the short term, but you will have a hard time getting prices back where they belong. Nevertheless, I recognize that in some circumstances, you may feel you have no choice but to reduce prices. When that happens, you should consider alternatives, such as offering a different—and less expensive—product or service in addition to the higher-priced one.
Sarah Rabenberg and her husband had fallen into the trap of offering the same, high-quality product at a lower price. In effect, they'd gone into competition with themselves. But the mistake could be rectified, thanks to the discovery they'd made: The market for low-end sheds was different from the market for high-end ones. There's nothing wrong with offering two different products at two different prices for two different markets, as long as the products really are different. Maybe Sarah and her husband would use less-expensive materials in the lower-end product. Maybe they'd offer some extras on the higher-end product. Either way, they can still promise the same great service. Then customers can choose what they're willing to pay for. Sarah said she liked the idea and would think about it.
Please send all questions to AskNorm@inc.com. Norm Brodsky is a veteran entrepreneur. His co-author is editor-at-large Bo Burlingham. Their book, The Knack, is now available in paperback under the title Street Smarts: An All-Purpose Tool Kit for Entrepreneurs.