In today’s buyers’ market, where consumers can compare prices between stores without even leaving their home, it’s tempting to adopt a lowest-price-on-the-market strategy. As customers toggle between windows on their browsers comparing identical Samsung 50“ Smart 4K TVs, it would be advantageous to have the lowest price appearing on the screen. Certainly, in that familiar circumstance the customer would choose the cheaper item almost every time. However, is committing to having the lowest prices on the market a good overall strategy? bad for Small and Medium Sized Businesses
Low price strategies are particularly bad for small and medium sized businesses (SMB). Lacking the size their larger competitors have, SMBs run into two major problems. First, they don’t sell enough volume to demand lower prices from suppliers. Second, those higher wholesale prices mean razor thin margins on the units the small business sells. Smaller margins and low profits are a toxic mix for a business with shallow pockets.
Small businesses are considerably better off using their small size to their advantage. Rather than compete on price, these businesses have the opportunity to charge higher prices with more personalized services or other value-added benefits. Getting involved in a race to the bottom can only spell disaster for an SMB. Selling high-priced, high-margin goods with a strong differentiator seems to be the better strategy.
Not All That Great for Big Business Either Big businesses have the economies of scale needed to survive as the low price market leader. Buying high volumes of products from brands can provide them with the extra margin they need to survive, although they will still be operating on thin margins.
While some big businesses can survive as the lowest-price retailer in town, they are living in a world of constant cost cutting. To maintain pricing levels, they need to standardize every element of their business, and rely on low-cost employees to get the job done.
Lowest Pricing for All Sized Businesses
There are circumstances where low prices can work regardless of business size. When applied to specific products rather than an entire showroom floor, a low-priced loss leader or promotional product can be highly effective in boosting sales. Penetration pricing, where products are sold at low prices so a company can enter a competitive market, is another circumstance where a temporary low-price strategy can work.
However, as an overall pricing strategy, striving to be the lowest priced option is not sustainable for most businesses.