Lower Pricing vs. Product Differentiation

From the Seeds of Innovation® newsletter:

"There are basically two strategies for designing superior business models: (1) competing with low prices or (2) competing by offering differentiated products and services.

Competing with low prices means you must become the low price producer of your products or services in your category. This requires standardizing processes, limiting cost of inputs, and ensuring a disciplined read of the prices being offered in your marketplace. With the advent of the Internet enabling buyers access to many vendors, this strategy is, indeed, a difficult one to pursue. Many organizations dabble with this strategy by offering short-term discounts in order to react to a competitor’s move, to give the sales force “something to talk about”, or to temporarily appease the retailer.

Remember though, short-term price discounting is a dangerous activity-–once you have discounted your prices, it is often difficult to return to “regular” prices or to raise your prices (even if your overall costs may have risen). Discounting may also lower the perceived value of your brand and may enter you into a lower price segment, a segment in which you did not want to compete. (Consider targeting only “profitable” volume and leave the low price volume to someone else.)

Competing by offering differentiated products and services is often the wiser strategy. In order to succeed with this strategy, you will need to identify (and then communicate) your unique point of difference in the marketplace. Involve your entire team in this discussion. Often frontline folks have the insights needed to identify what your customers really value. Avoid the words “high quality” and “great service” as points of difference-–they are overused and, as a result, often mean little to the consumer. Remember, if you fail to identify how your product or service adds more value, you will end up competing on price."