Should I drop my prices to be more competitive with the big guys?

This week’s Secret Soloist answer comes from Polly McGee, co-founder of Startup Tasmania. 

A friend of mine tells a great anecdote about a hairdresser he knows who opened a salon in a suburban shopping centre.

Her value proposition in a familiar service offering was pampering and personal service, which served her and her customers well. A couple of years into her lease, right across from her salon, another salon opened up, and emblazoned across their window was an enormous sign saying “$12 haircuts”.

My friend received a very distressed call from the woman, who was in panic mode, fearing her customers would be lured by cheap cuts in a tough economic time.

She wanted to drop her prices, but knew that by doing this she was going directly against her integrity, authenticity and brand – she felt, however, that she had no other option to compete against the newcomer.

My friend calmed her down and, as a clever man and a very smart marketer, provided the perfect solution. The next morning, across the window of her salon in bright pink writing, were the words, “We fix $12 haircuts”.

The postscript to this story is that the rival salon closed down a few months later and her salon, true to its brand, market and offering, is still going strong.

There is an undeniable temptation in an uncertain financial market to go into panic and reactive mode: austerity measures, collapsing markets, house prices plummeting; the news is rarely positive.

Too often I see the response from mumpreneurs when they are navigating competitors is that they should drop their prices; that reduction in price (i.e. their profit margin) is the answer to being more competitive.

I strongly reject this course of action. Price is a very small part of the buying proposition, but a critical one in terms of developing a sustainable business model.

Price is part of a complex emotional reaction by a buyer. Sure, in a commodity market like supermarket goods, price is a major factor, but in niche and service based offerings, the experience and brand values play a major part.

When you have spent a significant period of time building a value to your brand, why would you take a knife to it?

Discounting and price dropping to attract market instantly tells your customers that either you were charging too much to start with, or your product is inherently less valuable than you were putting it to the market as. Both of these cause confusion and distrust in the consumer.

If your sales are slow or slowing, go to your customers and your potential customers and ask them about your price-point. Better than discount, consider offering something extra, rather than taking away some of your profit by discounting.

With this approach, your customers get more, not less, and they still have the great product or service they originally came for.