As a followup to my post last time on pricing, when should price be used as a point of difference?
Generally speaking, competing on price is the worst way to do business because it lowers margins and profitability for all producers involved. But without a doubt, there have been a lot of companies, such as Walmart and Amazon, that have leveraged price as a competitive advantage. A few key considerations to think about before pursuing a low price strategy are:
1. Do you have a sufficiently large segment that buys on the basis of price? It’s only worthwhile to pursue this customers if there are a lot of them.
2. Can your business sustain a low price as a point of difference? Relative to your competitors, can you produce at lower cost and are you able to sell at a meaningful low price, while still have enough cash flow to reinvest in the business?
3. Is there no better position in the market? Low cost should only be used as a last option because a company can almost always spend the extra margin on more meaningful endeavors such as improving products, developing new products etc. and not handing this money to the customer.