As the economy continues its precarious path forward, consumers and business customers maintain a price-conscious attitude. Many large companies have made the decision to use price reductions, sales and rebates to increase (or maintain) unit sales. This tends to cause a great deal of grief to small business owners who are forced to decide how to respond.
In most cases, it would be a mistake to go head to head on pricing with larger competitors with seemingly unlimited financial resources. Making matters worse is their use of tactics, like matching competitor low prices to ensure that no business will underprice them. No matter how low you try to go, they’ll beat you. Even if the particulars of your business allow you to win the pricing game, the overall cost to your business is greater than the value of the customer that didn’t get away.
Once you are branded as the cheap guy, it’s hard to charge premium, high-margin prices.
How to fight back
There are multiple strategies that can be implemented to maintain your sales – or even increase them – without capitulating to the lower prices offered by larger competitors. Use your size to your advantage and consider these strategies:
Find allies in small suppliers
Larger, national competitors typically have centralized purchasing departments with firm-wide purchasing goals and guidelines. They buy in large quantities and tend to work with suppliers that can meet a number of stringent requirements and can accept onerous payment terms. Just ask any small clothing designer that has negotiated with a department store purchasing manager to hear firsthand just how challenging the process can be.
Many smaller suppliers with high quality or unique products simply can’t or don’t want to sell to large businesses. These are your natural allies. You can differentiate your inventory with these high value and hard-to-get items. Selling goods that aren’t widely available is a great way to generate sales without lowering your prices. The customers that seek these out will not be as price sensitive as buyers seeking commoditized goods.
Your customers are your community - cater to them
Most of the large retail chains take into account local market tastes and preferences when determining the inventory mix for each store. Their decisions are based primarily on historical and current sales. But you can take it one step further. If you are a member of the community where your business is located, you can use your genuine understanding of the local market to intimately know what is in demand. A small business can also go “hyper local” catering to different constituencies within a local community.
I recently spoke to the owner of a local food store whose meat department was able to maintain sales and elevated prices despite having to compete with four large supermarkets within a small radius. This was due to two reasons: first, the meat department maintained a butcher from the local community that has a high percentage of immigrants from the same country. These immigrants prefer certain cuts of meat that simply aren’t available (or even heard of in some cases) at the super markets. Second, the supermarkets are close, but inaccessible to pedestrians. Most people in this market don’t own cars.
Use your size to your advantage
Small businesses can be nimble and adapt quickly to changes. This is something that large companies try to achieve but have an inherent disadvantage in actually making it happen. It’s the difference between a supertanker and a speed boat trying to change course.
I recently met with a retailer who despite intense competition from large discount stores, was doing well this year. The secret is his superior location to his competitors. The square footage of his space is less than 15 percent the size of a typical big box retailer. This location was too small to be leased by a large company, allowing him to move in at a low rent and in the heart of his target market.
There is safety in numbers
If your local community doesn’t have a functioning chamber of commerce or business owners’ organization for your particular industry, consider starting one. There is much to be learned from your peers and banding together to brain storm, exchange war stories and discuss trends provides extremely valuable insight. Large, national competitors don’t have easy access to this market intelligence at a local level.
Be willing to say goodbye to bottom feeders
Not every battle is worth winning. Servicing unprofitable customers only makes sense if the period of unprofitability is limited, the loss is manageable and there is a highly probable opportunity to earn a significant profit in the future from this client. These three hurdles are pretty high. If you can’t match a competitor price and the client isn’t interested in differentiators like those presented in this article it’s probably best to part ways.
Many of these strategies can be implemented with limited cash investment. If they don’t work for you, they are reversible. If they do, the return on investment will be significant.
Mike Periu is the founder of EcoFin Media, LLC an independent producer of financial, economic and entrepreneurial content for television, radio, print and the internet. Over the past ten years he has started three companies and advised over 50 companies on financial strategies including fundraising. Mike also hosts regular small business webinars on a range of topics relevant to business owners.