Member Article

Is undercutting your competition a good idea?

For many small business owners, one of the most popular strategies for winning a client’s business is to undercut the competition. Whilst this may seem like a great idea, especially with consumers loving a bargain, is it actually viable, and could you be hurting your business? Below are a few considerations to contemplate before undercutting other businesses in your industry.

Can you afford to undercut the competition?

Many established businesses charge the prices they do because they need to cover their costs, and make enough profit to make their products or services viable. When considering your costs, it is important to factor in all of your expenses, including taxes, salaries, purchasing costs, etc.

In many cases, small businesses can often afford to undercut bigger companies due to lower overheads. A small business or self-employed individual most likely won’t need to contend with office rental and administration staff, which can significantly reduce the business running costs.

Not all small businesses do benefit from cheaper running costs. Even if money is saved on rent and admin costs, a small business may not have the buying power to buy products at substantially discounted prices. In these circumstances, undercutting larger brands may not be possible.

When pricing products and services, it is important to consider possible costs you may incur at a later date. For example, when a small company hits the £83,000 (or £70,000 for distance selling) threshold, they will need to start paying VAT up to 20%. As well as this, if a self-employed individual decides to become incorporated, they will then need to consider corporation tax on their profits.

What are the negatives of charging less?

The idea of simply charging a little less than your competitors to get customers flooding to your products and services may seem like a great idea, but it is important to consider the possible ramifications. Not only will you make less money, but it is also likely that your products and services will be associated with being ‘cheap’.

For a business to succeed, you will need to make more money than you are spending. Whilst large discounts may get people coming through the door, it will not be sustainable if you are unable to cover your costs.

In some industries, cut-price products and services are not what consumers want or need. If you are providing a high-end product or service, it is unlikely that this will be the best strategy for you. For example, if your target audience are high net worth individuals, having discounted prices will likely make your product seem less attractive and inferior to other products and services on the market.

Will you win more business?

As every business is different, it is hard to predict whether undercutting your competition will actually win you more customers. It is easy to assume that in most industries, you are likely to win more customers by charging less than others, but the long term impacts may make this strategy less viable.

Consumers love to make savings, and if the rise of price comparison websites, low-cost supermarkets and pound stores are anything to go by, there is demand for affordable products and services. If you are able to cover your costs, make a profit and ensure that your services and products are of a high-standard, undercutting the competition to win customers may be a viable option for your business.

This was posted in Bdaily's Members' News section by Natasha Smith .