Small business: How do you deal with price competitions?

brannsiu

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Apr 20, 2013
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When someone (he is also an individual without giant financial support) sells the products you are selling at much lower price than you do, competing and pushing against the profit margin just because he wants to beat down you first and earns the market shares. . What can you do to cope with the competiton?

I am not selling coke or bread where I can get it at 0.5 and I sell it at 0.6 or 0.7 and people will not bother comparing the price, people will not invest the time to look for alternatives at 0.55, they just wants convenience. Pick and pay and go.... because they are just too cheap to worry about.

I am selling something that is very costly and only a small group of people will be interested in it, no kidding I get it at almost 1000 for one from the source provider after re-seller discount. I cannot sell it at 1001 when I get it for 1000, make sense? Even if I sell it at 1001 and because it 's 1001. I will not immediately get 10000 or even 100 sales.

Is there any reading / study / research / university teaching about how to deal with such kinds of competitions?








 
Solution
Yes. You can learn more but the situation is much broader than just one individual under-cutting you.

First do some research and learn about "break-even" analysis. Basically with any product the analysis will tell you what quantity you need to sell at any given price just to meet expenses. Then you can add in "profit" as an expense.

Break-even analysis is used to determine if entering (or staying in) a particular market arena is even worthwhile. I once worked with someone whose bar needed to sell a bottle of beer at about $10.00 a bottle to break even. That was many years ago.... (Also required everyone in town, of all ages, to guzzle almost continually.)

You can also do sales to price curves that may, to some extent, provide...

Ralston18

Titan
Moderator
Yes. You can learn more but the situation is much broader than just one individual under-cutting you.

First do some research and learn about "break-even" analysis. Basically with any product the analysis will tell you what quantity you need to sell at any given price just to meet expenses. Then you can add in "profit" as an expense.

Break-even analysis is used to determine if entering (or staying in) a particular market arena is even worthwhile. I once worked with someone whose bar needed to sell a bottle of beer at about $10.00 a bottle to break even. That was many years ago.... (Also required everyone in town, of all ages, to guzzle almost continually.)

You can also do sales to price curves that may, to some extent, provide an optimum price. Something like for every $1.00 above cost/competitor's price) I will lose some number of sales. Starts at free being 100% "sales" and ending with some outrageous price being 0% (no sales). Much trickier to set up and support the numbers. You can use a spreadsheet to do modeling and run various scenerios regarding sales, expenses, and profits.

Expenses are variable, semi-variable, and fixed. The former being that there is a direct relationship with the quantity sold. Cost of Goods Sold (COGS) - the more you sell the more your costs. Fixed expenses are costs that you incur and generally do not change no matter how many items you sell - rent for example. Semi-variable expenses are sort of in the middle. They do not go up directly with sales but they may change some as sales go up. Advertising is an example. Sales may increase with advertising but doubling advertising expense does not mean a doubling of sales.

You will find all sorts of discussion and arguments accordingly.....not here to debate with accountants so will it at that and concede a bit of over simplification.

About the best way to compete is to provide faster, better, simpler, honest, customer oriented service. Offer more choices, better quality. Unfortunately the end result is often that the supporting (overhead) costs go up and thus your break-even point goes up. You need to sell more.

You may need to look into other product lines or products. And objectively analyze if you can honestly compete accordingly. You can provide the best customer service ever but if there are not enough customers then the long term outcome is probably not going to be good.

Prices wars are devasting. Ask any small business owner who has had a big box store or other undercutting business move into his or her area. Unfortunately there is really not much that can be done. Especially after the fact.



 
Solution