What makes a customer come to your store? Is it the excellence of your product that drives traffic, or the attractiveness of your pricing scheme? Do you differentiate? Do you compete?
It is important to know how to respond to these questions because the answers might just pinpoint your business’s greatest strength or weakness. Regardless of whether your store is under the traditional brick-and-mortar setting or the more recent e-commerce platform, you need to know what works for you best — product differentiation or price competition?
Let’s review the concepts first. Product differentiation is about identifying the unique aspects of a product in order to make it more attractive to a given market niche. It’s a way of making the customers distinguish the product from its competitors — they need to see it as the better one or the one that yields the best value.
On the other hand, price competition makes use of pricing as the main tool in conquering the competitive market landscape. The main purpose of price competition is to slice out a bigger portion of the market share by attracting price-sensitive customers. It is important to note, however, that market share optimization is usually done at the expense of cost advantage.
Both strategies are effective in their own ways. But which one is best for your business?
It is important to invest on product differentiation, but unless people can guarantee that you have something to offer, you’re just another small store queued up for bankruptcy.
If your current standing in the market is very high and you’re holding most of the market share, then it’s safe for you to participate less in the price war and focus your attention on the differentiation game instead. The same thing works if you have a really unique product and you almost have no direct competition — you can set a price higher than cost. The nature of your business and your position in the market allow you to compete on factors other than price. As long as you have a distinctive factor that sells to the public, your price doesn’t matter.
Co-CEO of Whole Foods Market, John Mackey, asserted his company’s high market position by refusing to stoop down to the lower levels where price competition is adamant. He said, “We don’t want to have a race to the bottom to compromise our quality to make us more price-competitive. Whole Foods is already well-established so it is not necessary for them to attract more customers by lowering their prices.” Mackey is confident that people will come to Whole Foods for its name and its tested product quality.
Product differentiation positions a product in such a way that customers will see that it is different from the rest.
In contrast, if you’re just starting out and are yet to gain a steady audience, then it’s probably best if you engage in some price competition first. Of course, it is also as important to invest on product differentiation, but unless people can guarantee that you have something to offer, you’re just another small store queued up for bankruptcy.
But why do you need to compete based on price first before you differentiate? This is because you need to attract a good number of potential customers if you want to grow. But how do you keep these people interested enough to stay? Lower your prices and be the big names cheaper alternative. People are sure to recognize you as a new choice if you have a product that is just as good as, if not slightly better than, the current products in the market. In this highly competitive landscape, you need to prove yourself first before you can command a higher price.
Indeed, if your business is just starting to make a name, it is imperative that you know about how to use pricing to your advantage. Monitor the fluctuations regularly and analyze your competitors to see if your price scheme is reasonable enough to compete with theirs.
However, there is just one drawback that you might face if you first introduce your business to the lower part of the pyramid. When you’re ready to scale up, you may find that your customers may not like the change. They’ve known you for being less expensive, so they expect you to remain like that indefinitely. You may find it difficult to raise not only your price but your store image as well.
At the end of the day, it all boils down to what you think is best for your business. If you think your business is ready to differentiate, go for it. If you think you can handle competing based on price, there’s no problem with that either! Whats important is that you know your position so you can act wisely and favorably.
Good luck on your venture! (PA)