December 05 2017
When it comes to customer loyalty, competing on price is easily the worst retention strategy out there — by a long shot.
Competing with your rivals to see who can get the absolute lowest price might not sound horrible off the top, but it’s a poor strategy — let’s look at an example:
Let’s say I’m a bookshelf maker who manufacturers mid-market bookshelves. We’re known for having sturdy bookshelves that look nice, but quality-wise aren’t too overwhelmingly amazing. We’ve got a nice little workforce, we’re able to offer them a decent wage and a few small benefits, and we’ve got the profit margin to reinvest a portion into customer appreciation programs.
We offer excellent customer service for our industry and always do our best to alert our current customers to new bookshelf offers — we even give them access to good deals from partners in parallel industries and we’ve invested in a loyalty program.
When our customers contact us, we take the time and make the effort to meet their needs. We go out of our way to send them gifts on holidays and their birthdays, and generally speaking, we put that profit to good use, allowing it to benefit both our employees and our customers.
We’re even able to give ourselves a small bonus during the holidays — isn’t that nice?
Then One Day, Our Competitors Drop Their Price, and We Get Scared
So our competitors come along one day and try to ruin everything — they’re offering a very similar product, and some of our customers cross over to the dark side.
And we get scared.
We worry that our efforts to offer excellent customer service and take care of our customers are underappreciated, or worse, not appreciated at all (not to mention costly). We worry that we’re going to lose even more customers if we don’t act fast.
So we take the path of fear and cut prices.
Of course, we can’t just cut our prices and keep doing all the same things we’ve been doing — that money has to come from somewhere, so we reduce the quality of some of our components slightly, which our suppliers don’t like too much.
But for the moment, we’re able to continue to offer the same great customer service and loyalty rewards that we’ve always offered.
Until the competition responds with another price cut, this one much deeper — turns out they’re able to offer a similar product for a vastly reduced price. In truth, they just severely cut their employee’s salaries and invested in enough automation to cut a bunch of jobs — they’re also using cut-rate components and old, worn-down machinery, all of which really reduces the quality of their final product.
We get scared again and cut prices.
This time, we have to make some changes. All the customer service stuff goes out the window, and we have to switch to a fully automated phone system — we don’t allow customers to speak to any human beings. We also have to cut the loyalty programs (because we had to let the employees running those programs go), the holiday bonuses are gone, and there won’t be any raises this year.
We can maintain the same level of quality, but our prices are still higher than the competition.
And our best employees, who see the writing on the wall, start to leave.
The competition cuts prices again and we’re beside ourselves — where else can we cut?
Quality takes a huge hit this time. We’re really squeezing our suppliers (the few trustworthy ones who are still around) until even they get tired of our brouhaha and send us to the truly low-quality guys.
Those low-quality parts severely affect our product (surprise, surprise), requiring a lot more work from our now-overworked-and-underpaid remaining employees.
Not to mention the fact that a lot of retailers are refusing to stock us anymore…
You can see where this is going.
Competing on Price Can Harm Your Brand, Your Workforce, Your Product, and Eventually Put You Out of Business
When you play the game of “who can cut the most?” your goal always becomes the bottom, and everyone takes a hit along the way.
No one wants to work at a place that can’t pay well and doesn’t offer benefits, which means your product quality suffers and your customer service suffers because the employees willing to put up with that mess are either a) very new and inexperienced or b) bad at what they do.
You might be able to get away with this when you’re a very small business or an entrepreneur just starting out, but you won’t get away with it forever. Bad customer service and quality reflect much more poorly on a brand than a perceived high price.
But it’s more than that — a high price can absolutely be a good thing. Many customers would prefer to pay more for better customer service, and the same can be said for quality — people often view a high price as an indicator of high quality (and are willing to pay it!).
Not to mention the fact that trying to appease customers who only care about price is a losing battle.
Competing on Price Means Competing for Cheap Customers
Cheap customers are impossible to please, and when you’re competing on price, those are precisely the people you’re working so hard to impress!
These are the kind of people who won’t be happy until you pay them to take a product off your hands (blargh).
Cheap customers are low-value customers who don’t value you or what you do, which means they’re going to overload your customer service employees with petty BS — they’re also going to cost more to acquire and maintain.
On the other hand, customers who value quality and customer service are going to be OK with spending a little more. They’re less work because they’re not always trying to undercut what you’re doing.
They’re happy to support you.
Which means you can provide a better product, which keeps not only your pockets full and your employees happy, but also keeps all your strategic partners happy — we can’t forget them!
Those greedy customers who are obsessed with price? They’re bad people, and they should feel bad, but they never will, so you should probably just avoid them. When your competitor drops their prices, increase your quality and/or your customer service and market the heck out of that increase.
Let buyers know that, if they want the cheap junk, they can go to your competitors — if they’re savvy buyers who understand the value of a good product and excellent customer service, they’ll work with you.
The Worst Part of All This? Quality and Customer Service Retains Customers — Price Does Not
The nature of cheap customers is simple — they’re almost never loyal to a brand.
They’re loyal to the price. The almighty dollar. The buck. The deal. The discount.
All they care about is saving money. They don’t give two figs for you or what you do. The only way you can retain them is to drop prices forever (until you’re just giving them stuff for free).
Who wants customers like that?
On the other hand, customers who value a quality product, who want to be treated well and receive excellent customer service, these folks are a joy to work with — they value you and what you do, and they’re happy to pay handsomely for it.
And even if some of them are rude and tough to deal with, who cares? You’ll be making a higher profit off the few tough customers than you would with the nickle-and-dimers.
With that extra profit, you can grow your business, keep your employees happy, attract top talent, and build a brand that dominates the market.
Competing on price is the first step on the road to the destruction of your brand, but if you really want to tear your brand to pieces, read the magnificent Sam Hurley’s article on how to absolutely ruin your brand reputation in 9 easy steps.