Being Cheaper is Not a Competitive Advantage

As someone who attends dozens of startup pitches a month, “our product is cheaper” is a phrase I hear all too often. I see it time and time again. A company believes it can disrupt the industry by offering a similar product at a lower price, but the end result is that the established companies simply lower their prices until the startup is forced to quit.

Competing on price is a very dangerous game and unless your company has truly managed to be able to find a way to lower costs that is not through just operating at a lower margin (use margin calculator for the accurate results), your cheaper prices are not a competitive advantage.Instead, a competitive advantage that is not easily replicated provides a far more stable way to push your company ahead of competitors. You can take a look at some of the technological advantages that we built for our partner companies here.

If you want to compete on price, there are two key questions to ask yourself.

1. DOES YOUR TARGET CUSTOMER PRIORITIZE COST?

As much as we all love money, cost is often not high on the list for many industries. One of the most common factors here is understanding the difference between the customer who actually chooses which product to purchase and the customer who pays for the product themselves. Let’s take human resource management software for example. When shopping around for HR software, the primary decision maker is usually the head of the HR department. While they usually have a budget, the far more important factor that they consider is simply how can the software make their jobs easier.

Click here to see where we used our development team to create a technological competitive advantage for Omnidian.

2. IS THE PRICE DIFFERENCE SIGNIFICANT ENOUGH?

“Significant” is very hard to quantify without a large amount of data to do some price sensitivity analysis, but most businesses can get a good sense of price sensitivity with some basic business analysis. In general, the more specific your product is, the less price sensitive your customer will be. A product that is highly tailored and niche such as a custom built bolt for the US Air Force will be far more expensive than a similar bolt from Home Depot.

Another key factor that is often forgotten when considering price sensitivity is switching costs. If we take enterprise software for example, the price difference would have to be very significant before a company is willing to switch over to a competitor. All of the switching costs such as retraining employees, transitioning over to a new software system, etc can easily negate your lower prices and in many cases, switching costs can make it actually more expensive to change over to a “cheaper” enterprise software system.

New entrepreneurs and startups tend to gravitate towards being cheaper as a differentiator. After all, it is one of the few ways where you can have a numerical value represent just how different your product is compared to other companies. That said, I continue to advise startups over and over that while other competitive advantages are less quantifiable, they will serve your company far better than going the route of simply being cheaper.

Want to build yourself a technology based competitive advantage? Contact us here.