If you are a startup or small company, it’s common wisdom to not compete on price. If price is all that differentiates products in the same category, then customers will buy from the lowest-priced competitor. This means that competitors will constantly be pricing their products lower and lower to win business to where eventually, no competitor has any profits. Or, the competitor with the most efficiencies who can eek out a profit will end up the winner, putting the rest out of business.
So, if you are a startup or small company, when is competing on price as a small CPG OK? By competing on price, I mean that it becomes one of the brand pillars on which you build your entire company and use heavily in your promotion.
I think it’s OK to be competing on price if you can defend this position against competitors now and well into the future, without cheapening your product and giving a good explanation to your customers about why you are the lowest price.
Let’s unpack that statement.
1. Defend your position. This simply means that you are able to prevent your competitors from matching your price so that you stay the lowest-priced competitor.
One defense is through intellectual property patent(s), where, for example, you have a patent on a manufacturing process that allows you to more efficiently make your product, thus allowing you to earn the same profit margins as your competitors, but with lower prices. Or you have a patent on a product that is better than alternative products and can also be sold for less.
Another defense might be in your supply, where you are able to more cheaply source raw materials than your competitors. Or, you own your supply chain, where you cut out intermediaries, thus lowering costs. Or, you are purchasing locally, reducing the transportation miles required to get the raw supply to you.
A third defense might be distribution, where you sell direct-to-consumer, cutting out distributors, retailers and other resellers entirely.
2. Don’t cheapen your product. You don’t want to use inferior materials or processes to produce your product such that it will not meet your customer’s expectations. “Expectations” is the key word, here.
3. Give customers a good explanation about why you are the lowest price. Low prices can mean lower quality. You don’t want to communicate that your product quality is lower because of price. Thus, I think it’s important to be very proactive and transparent in telling consumers why you are the lowest in price. Maybe it’s because you source locally, sell direct-to-consumer, or have a patent on a manufacturing process that allows you to produce more efficiently. Whatever it is, it is critical that you get this across so as not diminish the perception that your lower price means your products won’t meet expectations.
Satisfy the above three and you have a good shot at competing on price and really winning big because price is a very powerful way to gain customers and marketshare.