The Danger of Competing on Price (And How to Avoid It)

This article originally appeared in my Inc. column.

When I'm asked to vet a business idea, one of my first questions is always about differentiation. And, I'm never surprised to see that aspiring or new entrepreneurs typically only look at one competitive measure: Price.

While I agree that price is a great way to compete, I disagree on the unilateral direction that most business owners take--which is invariably to push prices in a downward direction. I've seen too many businesses suffer from the danger of competing on price, which is why I now take great care in helping entrepreneurs avoid this pitfall.

The ironic thing is that you can only lower prices so much before you go out of business. Meanwhile, if you do the opposite and raise prices instead of lowering them, you have an infinite expanse into which to continue to raise prices and grow.

If you're ever in the mood to remind yourself how much more work you have to do in this world in order to be successful (a masochism I am inclined to take on from time to time), put CNBC's "Secret Lives of the Super Rich" on your DVR recording list. Yes, you'll enjoy seeing inside the luxury homes and superyachts, but if you listen closely enough, you'll also notice something else that has a direct impact on your business.

The lesson is in the price quotes. When the host quotes any price appreciation figures for luxury goods on the show, the annual appreciation is invariably high. Items with outrageous prices seem to take on appreciation faster than normal items, which defies any kind of logic. However, if you think about it, it makes perfect sense: The people who can afford luxury boats, yachts and country club memberships can afford those same things at virtually any price.

In other words: They are quality-sensitive, not price-sensitive.

Think about what this means for your business. Imagine, for a moment, that you reorganized your product or service to be the most premium option in the market. Doing so would give you several quick advantages:

1. You would have an identifiable differentiator

In any industry, it's easy to spot the premium solution. Just look for the highest price, and voila! Given that there are always consumers who equate price with quality (note: that's a big consumer mentality), giving yourself a premium price simultaneously earns you a ready-to-buy, niche market within your industry.

2. Your margins would increase – by a lot

Margins on premium products are higher than they are on average products. Plus, the profit percentage is a larger number because the product or service has a higher price tag to begin with. Are you seeing dollar signs yet?

3. Competition would drive your business up, instead of down

If someone comes in and tries to out-premium your premium offering, your strategy is simple: raise prices! Imagine what your business would look like if it were forced to keep raising prices instead of lowering them, and you'll see the power of this strategy.

I'm not only a fan of premium pricing; I'm a practitioner. From my days of working retail in the figure skating industry up through selling million-dollar marketing solutions today, I've always embraced having a premium offering as a core business strategy.

So ask yourself: What small changes could you make to be the premium provider in your industry? If raising prices makes you nervous, remember this: every entrepreneur is in the business of creating value, first and foremost. No matter the price, as long as you're providing value to your customer in exchange for your offering, everyone walks away a winner.

The only difference is that with a premium-price strategy, it'll feel like winning is a whole lot easier.

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• Analysis
• Strategy
• Price
• Competition
• Differentiation