Competing on Price vs. Competing on Value

E-commerce is a complicated venture, but two routes for profit stand out above all the rest – price and value. To remain competitive in a highly-competitive marketplace, it’s crucial that entrepreneurs remain abreast of the advantages and disadvantages of each approach.

pricesCompeting on Price

This is pretty self-explanatory, and through this process, most vendors will lower their prices in various forms. Price changes can occur directly, or indirectly, via discounts, temporary sales opportunities and rebates, and other tactics.

Advantages: Price competition can have huge benefits – so long as you also have huge resources to expend on your strategy. If you can purchase products in massive quantities, then your savings on purchasing cost – can be relayed to your customers. Everybody wins!

Disadvantages: It has to be said that if you pursue this strategy – then your business is tied to it at all times. All of your business costs must be kept minimal in order to maintain your competitive advantage – and any cost factors that might push your low prices up threaten the continued operation of your entire business.

walmart-logoAnd that’s only the tip of the iceberg, because the vast majority of entrepreneurs aren’t yet – and likely never will be – the size of the major retailers that have turned this strategy into high profits (such as Walmart and other major retailers). And if you do – you can almost guarantee that you’ll one day find yourself in direct competition with them!

The cons for small business and startup entrepreneurs are vast and diverse, but here’s a brief overview:

Your brand identity as “the cheapest seller” is constantly under suspicion – because a competitor can always undercut you at any time.

Bargain hunters are only loyal to price – and their constant demand for lower prices threatens your profits just as consistently.

Customers will still demand a high level of service – which cuts into your profits and resources. (Need an example? Just look to Amazon – a company that, surprisingly, has barely turned a profit in over 20 years as the top internet seller.)

iStock_ValueCompeting on Value

This is represented by having a superior or better-made product.

Advantages: There are a variety of ways to add value to the product you are selling – everything from the content of your product description, support center, installation guides, logo… the list goes on and on, and creating content via multiple media outlets creates even more opportunities.

In a way, what you are selling through your content is reassurance and guidance – and if you’re operating in a niche market, those qualities can be a huge win in terms of generating new – and maintaining your existing – customer base.

And that’s not all – the Dos Equis’ “Most Interesting Man in the World” ads are a prime example of how humor and branding can generate profit – and, heck, just bring a lot more fun into the so-often serious nature of running your business.

Disadvantages: Creativity, imagination, and innovation are a requirement in this type of marketplace – and it seems clear that this is the dominant market for most startups.

Beyond this, certain tactics of reassuring the customer can seem risky – such as guaranteeing refunds greater than the original cost of the product, or return policies with very generous windows for product return. The benefit of reassuring the customer is constantly combined with a certain measure of risk – and some customers can never be reassured.

So, what’s the best approach for you? If you’ve got the resource to compete with the top price slashers out there – go for it! Meanwhile, if you’re just starting out and operating on limited resources – like the vast majority of startup entrepreneurs – the choice is clear: compete on value.

What experiences have you had competing on price versus competing on value? Does one work better than the other for your business, industry, or target marketing? Share with us in the comments section below. Thanks!

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