The Dangers Of Predatory Pricing
There is a significant difference between engaging in competitive pricing and undercutting the market. However, in today’s world, as competition continues to escalate, businesses are always looking for a competitive advantage. A variety of strategies are used in the battle for customer acquisition and one of the more taboo strategies is blatantly undercutting the price of the market. This tactic is not only generally frowned upon and in certain circumstances setting prices too low can be illegal. Substantially undercutting also comes with a few disadvantages.
It Reduces The Value Of A Businesses Sales:
One of the main reasons a business might engage in undercutting the market is greed. The general understanding is that lower prices mean more sales. Unless a business has found a way to provide a product or service for a substantially cheaper price, then their margin is going to be much tighter. Meaning, less profit from each sale. Substantially undercutting might get more sales, but how many more sales are needed to cover the businesses overheads?
Restricts A Business From Creating Brand Value:
When building a business it is crucial to develop values that will resonate with customers, attracting their business. When the incentive for a potential customer to buy from you is price alone, at the end of the day that is all they will care about. This is detrimental to your business for one of two reasons. Either when you inevitably have to begin increasing your prices or when a competitor undercuts your already low prices, your customers will move on. Instead of relying on a cheap price, build a business that emphasises quality in product and service, justify your price instead of sacrificing the integrity of your business for a quick sale. There are thousands of unknown cheap watch manufacturers, but everyone knows Rolex.
It’s A Great Way To Piss Off Your Market:
There’s no arguing that the business environment is a jungle. It is a constant battle with everyone competing for market share. This competition is healthy, it forces businesses to hold themselves to a higher standard in order to compete. However, when all is said and done businesses are all in the same boat. Undercutting the market can lead to business failure for those who cannot afford it. Additionally, it can have a rubber band effect when prices do rise again, they may have to increase substantially more to cover the cost of continued reduced profit margins. All these hurt the market and piss off other business owners within your industry. When a business undercuts the market they better hope they can outlast their competitors, otherwise, they risk closure, or being stuck in a market where no one wants to work with you.
There’s no doubt that undercutting the market can come with immediate benefits. However, when considering this as a business strategy it is essential to understand the disadvantages that come with it. Can your business survive it in the long run?
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