When you're selling against a lower-priced competitor, you have two choices: discount or differentiate.

Offering a discount is easy, which is why sellers resort to it. Unfortunately, discounting reduces your margins and makes you vulnerable to further price drops from the competition.

Differentiating is a bit more difficult, but tends to keep your margins buoyant while locking out competitive threats.  There are five basic ways to differentiate:

1. Differentiate by Feature

Highlight some element of your product or service that the competition's product lacks, so that the customer sees that feature as a "must-have" that justifies the higher prices.

Example: Apple's devices offer (among other features) a wider range of apps than Android devices, thereby commanding a higher overall price.

2. Differentiate by Quality

Point out that your offering, though superficially similar to the competition's, is actually better made and/or more durable. The best way to do this is to provide objective test results. 

Example: Television commercial comparisons between (more or less identical-seeming) automobile brands.

3. Differentiate by Convenience

Note that it's easier to purchase, get support for, or resell your offering, as compared with the competition's.

Example: Amazon.com, unlike traditional brick-and-mortar bookstores, offers buyers the ability to quickly choose from a huge inventory, as well as the option of reselling purchases.

4. Differentiate by Pre-existing Relationship

The customer prefers doing business with your firm because you are seen as a resource with unique and specific knowledge about the customer's business.

Example: When the erstwhile "big eight" public accounting firms launched consulting practices, customers often hired them at premium prices because those customers valued the business understanding that came from auditing their finances.

5. Differentiate by Strategic Relationship

The customer prefers doing business with your firm because your firm is intimately involved in the development of an important part of the customer's own business strategy.

Example: IBM sales reps in large accounts often act as general IT consultants and informal members of the customer’s IT staff--helping to guide overall IT strategy as well as acting as a purchasing liaison to IBM.

Use Multiple Approaches

For clarity's sake, I used familiar business examples from large firms.  However, all five strategies work equally well for smaller firms. And you probably want to employ multiple strategies.

For example, suppose you're in the situation where most of your revenue comes from one or two large customers.  (This is a very common occurrence in small companies.) The last thing you want is for a lower-price competitor to swoop in and grab that business away from you.

Since those customers are so important, you need to make certain that they both understand and value whatever differentiators are in place (like quality and convenience). You should also begin building personal relationships and (probably) strategic ones.

You might, for instance, find ways to provide your customers with valuable information about other areas of their business, or cultivate individuals in the customer organization to be part of publicly available case studies.

Ideally, you want to cultivate as many differentiators as possible, so that your customers gradually begin to view the idea of jumping to a competitor as impractical and foolish, even if the competitor's offerings cost less.

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