Never Compete Only on Price in a Startup
I recently spent an hour listening to an entrepreneur share his startup story. After analyzing his business from many angles, I asked the question, “Why would your prospective customers switch from what they are currently doing to use your product?” That’s a powerful question. I wanted to understand the mentality of the prospective customer.
This particular entrepreneur immediately replied, “We are going to be much cheaper than the other options.”
When the first response to a question like that has to do with a lower price, I immediately think of a flea market style business. It is not attractive.
Here are reasons that competing on price is a terrible approach to building a startup:
- Most of the market has already purchased the alternative product with only a limited percentage renewing or repurchasing in a given year. Convincing on price only matters when people are in the act of purchasing; not when they already have a purchased alternative.
- Lower price kills your ability to spin up enough cash to build a valuable product. Your product will stink compared to the alternative because you will not have enough resources with which to build and maintain a great product. You are leaving cash on the table by pricing too low.
- Startups have enormous hurdles to overcome by establishing their brand and positioning in the marketplace, in order to displace established conventions. If your main message is lower price, people will automatically question the quality of your offering. That can hurt your branding efforts, which is vital to your early growth.
What are your thoughts about competing on price in a startup?