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You may know the feeling: you have a great product or service that puts the competition to shame. But the competition is winning far more business than you are. What gives?

As much as we'd like to believe that a superior product or service is the end all and be all of business success, it isn't. Sometimes the company that offers less wins more.

Here are five reasons why.

The competition is entrenched.

Although the value of 'being first' is usually oversold, it can make a real difference. If you're selling something that is trying to replace a product that is entrenched in the marketplace, for instance, you may find yourself fighting a steep uphill battle to gain acceptance, even if your product is superior. This is especially true when your product or service relates to something mission critical. In these cases, comfort will often trump superiority. After all, who wants to risk breaking something that seems to work okay now?

What to do about it: be realistic and be strategic. One of the keys to beating entrenched competition and gaining acceptance is having a good grasp of how long it usually takes new products to be accepted in your market and understanding how to approach the sales process. Many companies in these situations could succeed but instead fail because they were unrealistic about what they had to do to break into the market and weren't prepared for a long battle.

The competition has better marketing and messaging.

Few products and services sell themselves. Even if you offer the best product or service in your market, you can never assume that customers will beat down your doors because of it. At the end of the day, how you market your offering and craft your message makes a world of difference. A competitor with a stronger marketing strategy and more compelling value proposition can easily do more with a lesser product or service.

What to do about it: do some research. Evaluate how successful competitors are marketing themselves and if possible, try to find out what they're telling potential customers. Two possible ways to do this: employ a shill and get your competitors to pitch the shill so you can gain insight into how they sell. Or try to talk to your competitors' customers and former customers to learn how they've been sold.

Once you know how your competitors are winning customers, you can adjust your marketing and messaging accordingly.

The competition has more competitive pricing.

Not all markets are price sensitive but many are, especially in tough economic times. If you're selling quality when your market more heavily weighs price, an inferior competitor can easily win business. It's an inconvenient truth: while most of us would like to believe that quality is the end all and be all, that's not always the case. When a potential customer perceives that the extra money being paid for a higher level of quality is disconnected from the value of that extra quality, price can play a huge role in a purchasing decision. So if your competition has a better balance between price and perceived quality, they can easily take business away from you.

What to do about it: this is a tricky one. A lot is factored into pricing (eg. materials, labor costs, etc.) and there's no hard and fast rule for adjusting your pricing because you may or may not be able to change the cost of your inputs. But if you're consistently losing business to the competition and price is cited as a reason, you have to get a better feel for what potential customers are really looking for in terms of quality and price, not what you think they're looking for.

The competition has better relationships.

The almighty Rolodex can take a company far. If your competitors have better relationships than you, the fact that their products and services might not be up to par may not always matter. While this is not to say that solid relationships alone will always deliver deals, they can open doors and sometimes opening doors is the hardest part of the sales process. Which explains why an inferior competitor with a solid Rolodex can eat your lunch.

What to do about it: take advantage of existing relationships and focus on building new ones. Most of us have better networks than we often believe. Take some time to carefully sort through all the people you know; you'll probably connect the dots and find some gems you didn't know existed.

When it comes to building relationships, it's easy to get lazy and do most of your 'connecting' online thanks to online social networks like LinkedIn. But the best relationships are still built offline so be on the lookout for in-person networking opportunities. From local organizations to trade shows, there are always plenty of places to meet new people. Finally, if you need to, think about acquiring a Rolodex by bringing on someone who's well-connected.

The competition isn't inferior.

Entrepreneurs lie to themselves. If your competition is eating your lunch and you can't figure out why, it might just be that the competition isn't as inferior as you'd like to believe.

What to do about it: face reality. Once you accept that your competition may be capable of giving you a run for your money chances are you'll face up to inconvenient truths about your business and recognize what you need to do to become more competitive.

Photo credit: susansimon via Flickr.

Patricio Robles

Published 26 June, 2009 by Patricio Robles

Patricio Robles is a tech reporter at Econsultancy. Follow him on Twitter.

2392 more posts from this author

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Hyderali

Good  Post Patricio,

But what if we have face the competition with giant rival and we are small business it will take time to kick out the big company. Customers behaviour also depends because they like the brand & they are using it from long time. If we have the solid connection and product it will take time to reach the greater audience.

I hope you should also have written about the outcome of the competition face between small and big like google and bing.

Waiting for your follow blog on the same.

Thanks.

about 7 years ago

Alec Kinnear

Alec Kinnear, Creative Director at Foliovision

Can't agree with this one Patricio. Winning on price will destroy your business (driving you into unprofitability).

Often the solution is to improve and personalise your service.

On the other hand, sometimes it would just make more sense to fold rather than decrease prices and bleed to death. Some businesses have their hayday and then aren't worth much anymore.

Bowling alleys went through that cycle a couple of times (off the top of my head).

about 7 years ago

Patricio Robles

Patricio Robles, Tech Reporter at Econsultancy

Alec,

I don't suggest that companies should cut prices to unprofitable levels. Competitive pricing doesn't mean cheapest pricing.

If I'm selling a widget for $100 and justifying the price based on the level of quality I offer when my competition is selling widgets for $75 and offering an acceptable level of quality, I had better make sure that the extra quality I'm providing is worth at least $25 to the customer.

In many lines of business you can have a higher price but still beat the competition if your customers see enough value to justify the higher price. But there's always a limit at which point the extra cost is so disconnected from the additional value received that few customers can justify the cost.

So if you're struggling to win business, you may need to look at how to make your pricing more competitive if pricing appears to be an issue.

about 7 years ago

Alec Kinnear

Alec Kinnear, Creative Director at Foliovision

Patricio, again, the idea would be to make your service competitive not your price.

There is always somebody willing to sell at a loss in nearly every market.

I hate those hardcore marketing clowns some fool was quoting out of context the other day, but about this they are right.

Competing on price is a route to bankruptcy. Unless you are willing to go with economy of scale and mistreatment of your workforce.

What's an example of businesses competing on and winning on price? Walmart, McDonalds.

Even Amazon. But they had seven years of losses to start, while they were clearing out their market!

Please give me some examples of businesses successfully competing on price and flourishing.

about 7 years ago

Patricio Robles

Patricio Robles, Tech Reporter at Econsultancy

Alec,

I think you're missing the point.

Competitive pricing does not mean lowest pricing. It does not mean selling at a loss.

Again, it's about value and customer expectations, not price. If you're charging $150/hour for a service that everyone else is charging $50-75/hour for, you have to be providing $75-$100 in perceived extra value to justify your price. Maybe you can, maybe you can't. It depends on what type of service you're offering and what customers expect.

You talk about 'making your service competitive' but in the real world there is always a threshold at which an extra cost exceeds any extra value the customer perceives. Perhaps you can charge a 15% premium in your market on the back of your reputation for providing quality service; but a web graphic designer, for instance, isn't likely to win business charging $250/hour no matter how good the quality of the work product.

So again, this is not about cutting your own throat and providing your products and services at a loss. It's about common sense.

If you're charging 20% more than your competitors and business is booming, you clearly have a value proposition that's resonating with clients. On the other hand, if you're charging 50% more than your competitors and are being told by prospective customers that you're you're too expensive and pricing yourself out of the market, you'd be foolish not to recognize that there's a disconnect between your price and the perceived value you provide.

Competitive pricing = the right balance between cost and perceived value. Every business that succeeds has to price its products and services within an acceptable price range for the market it's targeting.

about 7 years ago

Ian Tester

Ian Tester, Senior Product Manager at brightsolid online publishing

Have to go with Patricio on this one. Apart from anythng else, there's the cost / volume of sales curve which in many cases can dictate that lowering your price increases your sales.

A few years ago we priced our online subscription at £125 and weren't getting enough sales. We reduced it to a more realsitic £90 (interestingly still above our competitors, not *cheapest*) and actually our takings increased.

Why? Well, we obviously made more sales which compensated for the cash from reducing the price. However, most critically, we stopped discounting the product as we had been previously just to generate cashflow. Results: more customers, more cash and customers who don't wait for an inevitable "discount" before they buy. At the same time we introduced a loyalty discount for renewing customers and a guarantee that new customers won't get a larger discount than this. Keeps us honest (stops us discounting heavily), keeps customers happy, increases our renewal rates dramatically. Be nice to your customers and they'll stick with you.

about 7 years ago

Alec Kinnear

Alec Kinnear, Creative Director at Foliovision

Well, I suppose in the case of Econsultancy, or other subscription type info products, with no incremental cost based on volume, Patricio you and Ian might have a point.

Especially if the subscription is priced at a silly rate or to be more diplomatic, optimistically.

If you are talking about services which require actual human attention, you are dead wrong. There is no bottom to the price discounting.

Winning formula: Improve your service, increase your prices.

We've doubled our revenue every year on that formula and have no plans to change. And the lineup stretches around the block.

Of course if you can't - or are unwilling to - improve your service, you better get ready to start cutting prices and used to foodstamps.

about 7 years ago

Patricio Robles

Patricio Robles, Tech Reporter at Econsultancy

Alec,

You continue to miss the point. You can only charge so much for a service. If you could perpetually improve your service and raise your prices, everyone would be rich.

In every single market, there is a range of prices in which almost all business takes place. In some markets, that range is narrow; in others it can be quite large.

I see you offer a variety of services and I'm sure you do a great job for your clients. So let's take your web design services. You seem to imply that the only thing keeping you from charging, say, $500/hour for web design is the quality of your service. But you could have the most impressive portfolio and roster of clients and you'd be lucky to find a single client at that cost. There'd be no way for a client to justify it.

What you apparently refuse to acknowledge is that despite the fact that you're increasing your prices and doing well (which is great), you're (obviously) still within a range that is acceptable to the market. In other words, your clients look at your rate and the quality of your services and they see enough value to deem your pricing competitive. It is not so out of line with what others are charging that clients have to consider whether the extra cost is worth it.

If you go too far and raise your prices too much, you will start to lose business. At that point, you'd be foolish not to recognize that your pricing has ceased to be competitive because the balance between what your clients are being asked to pay and the value they can realistically perceive in what they receive is out of whack.

Finally, this post wasn't discussing any particular product or service specifically and was simply pointing out that if you're not getting business and price is cited as an issue, you obviously need to look at your pricing. Some markets are far more price sensitive than others and your pricing should always factor in what your clients value the most, what the supply/demand curve looks like, etc.

about 7 years ago

Alec Kinnear

Alec Kinnear, Creative Director at Foliovision

Hello Patricio,

There are people who charge $500/hour for web design services and get it. I know some of them.

And in the end, they shut down those services as they couldn't be bothered to do the low end work.

Normally I find your articles on the mark, but this time you are giving bad advice which could potentially be very destructive to your readers.

If your readers' businesses are not getting leads, the primary obstacle is probably not price. It's likely the services, the offer, the presentation - anything except price. Lowering price is likely only to get you the worst clients and put you into unprofitability.

It's a downward slope from there.

If you have to lower price to bring in clients you should shutter the doors now - it will be quicker and less painful than the slow slide down into bankruptcy.

Who is missing the point here?

about 7 years ago

Patricio Robles

Patricio Robles, Tech Reporter at Econsultancy

Alec,

Since you refuse to believe that a company can make its products and services more cost competitive without forcing the company into bankruptcy, here's a hypothetical scenario that should make it very clear.

You offer a service that is much more inclusive and high-quality than your competitors. But your competitors are eating your lunch.

Through discussions with existing customers and prospective customers who chose the competition (not assumption), you discover that one of the 'value-added' service components you provide that your competitors don't isn't valued as much by prospective customers as you thought it was. As it relates to pricing, this means that one of the pricing inputs that you thought was an asset was really a liability; it forces you to raise your prices but your customers don't see the value in it.

Instead of burying your head in the sand, you stop providing this service component without any harm to your value proposition. Interestingly, this service component is one of your most expensive inputs so by eliminating it, you are able to lower your price while actually boosting your margins.

Prospective customers are now happy because your pricing (which still may be at the higher end of the market) reflects a better balance between cost and perceived value.

Get it?

The point here, again, is that pricing is relative. The dollar amount you charge for a product or service is irrelevant without context. You cannot fail to look at what specifically you're providing and where your potential customers see value. If your customers value x but your pricing is based primarily on the cost of providing y, you've got a problem. Adjusting your pricing (down or up) is an exercise in finding balance. Find the right balance and by definition, you've found a competitive price point.
 
By the way, I'd love for you to reveal the people who are charging $500/hour for web design. At $500/hour, they had better be doubling as attorneys, accountants and cardiac surgeons. I call nonsense.

about 7 years ago

Alec Kinnear

Alec Kinnear, Creative Director at Foliovision

Hello Patricio,

Sorry to hear you undervalue the design profession so much.

Would you like to put 200€ on the line before you call nonsense so casually?

Otherwise, I think our arguments above are clear on both sides of the question.

To reiterate: if pricing is the deciding factor of your offer, there is something wrong with your offer and I doubt pricing will fix it.

about 7 years ago

Patricio Robles

Patricio Robles, Tech Reporter at Econsultancy

Alec,

With all due respect, I think it takes a lot of gall to say that I've undervalued the design profession just because you don't like the fact that competitive pricing is based on a balance between the amount you charge and the value being provided to the client and that companies often overshoot or undershoot on both sides of the equation.

As for your wager, if you're going to state that you know 'people' who are succesfully charging for web design what a veteran corporate attorney charges, I don't see why you'd hesitate to reveal who they are. I'm sure you believe a fee of 200€ is a fair price for typing out the names but unfortunately, 5 minutes of your time to prove me a fool isn't competitively priced at 200€.

about 7 years ago

Alec Kinnear

Alec Kinnear, Creative Director at Foliovision

You called nonsense, I called your bluff.

No problem. Let's leave it at that.

about 7 years ago

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