One of the quickest ways known to help a young company build market share is to under price your competitors. And using such a strategy may give your company a boost in sales but at can come at a steep cost. The pitfalls you could be facing include lost profits, addicted customers, and angry competitors.
So what are you giving up? Well your potential profits for starters. The whole point you went into business is to make money. And yes if you don’t land some sales you’ll never bring in any money. But if you don’t make any money on the sales you do make then you’re only going to be spinning your wheels. And if you continue this strategy long enough you’ll only cause your business a whole host of other problems.
The next issue and this is probably the most important is that your customers can become addicts. Your customers came to you because of the low prices. Not the better service or some other reason. They specifically wanted to pay a lower price and you gave it to them. And now you want to be able to make money off of them as well. Of course they don’t know that you might be losing your shirt because of the price you are charging them. So your customers become addicted to the low prices you charge and this means they may be resistant to the notion of you raising your prices.
Another issue is the attention you may attract from your competition. Competition normally is healthy for a business. It helps your business focus on being innovative and encourages you to try new methods of winning sales. Unfortunately because you are winning customers by under cutting your competitors they will take notice and you may cause a price war between yourselves and them. And because you are already giving up your profit margin you probably can’t sell your products or services any cheaper than you already are. But your competitors may be able to as they may have deeper resources than you.
Before considering an under pricing strategy to win customers you need to thoroughly examine how low you can go until you hit your break even point. You also need to examine how long such a strategy can be allowed to go on. In addition you will need another strategy that will allow you to at some point raise your prices to a more acceptable level without losing the customers you worked so hard to gain. An under pricing strategy can work but you need an effective plan to end it.