Categories: Business, Marketing

“We’ll get more customers by being the cheapest,” is not a very attractive feature on a business plan.

Trying to be the cheapest will nearly always lead to disaster.

Firstly, you can’t produce the same quality as your competition. They’ve built systems to make their processes more efficient, and will already have customers paying them. To compete, you will have to use cheaper parts and/or labour. Therefore, you will get a reputation as being “cheap.”

Secondly, your competitors will have to lower their prices to compete with you. Since your main selling point is your price, you will have to do the same to keep your advantage. This continues until neither of you are making a profit. Then it is just a matter of seeing who goes bankrupt first.

Thirdly, people question cheaper goods. Even if you are legitimately producing your goods for 20% less, customers will want to know why you are cheaper. The natural conclusion is that you are using poorer quality materials and parts. As a result, they will often see the more expensive goods as a safer option.

The weird thing is, a number of studies have shown that increasing the price of something often increases sales. People link higher price with higher value. This is mainly true with luxury goods (would Porches be so desirable if they cost the same as Ford Fiestas?)

Price will play an important part in the customer’s buying decisions, but other factors – such as features, customer support and quality, can easily make up for this.

There are some examples where companies have made low price a major part of their business strategy: take the low-cost airlines industry.

However, in this example the low cost wasn’t just used to compete for the existing customers of other airlines, but to attract new people to air travel. The dramatic price drop has increased the market for flights by many hundreds of thousands of people a year. They’ve also opened up far more routes across Europe.

If Ryanair and EasyJet had just tried to poach the existing customers from British Airways, they wouldn’t have lasted long.

So, unless you are planning to grow the market, it is best to focus your energies on making the best product – rather than selling it at the lowest price.