Ever tried going head on with a larger, more established business? It’s tough. They have economies of scale in bulk purchasing, more efficient HR, more bargaining power, and possibly better tech that help them achieve a lower cost price. If you’re looking for how to be price competitive as a startup, I have some suggestions for you.
As a new startup, you don’t always have to be afraid of price competition against larger businesses. In many cases, you be price competitive as a startup. Of course rule number 1 is to try to avoid a price war with a larger company. They can lose money for a lot longer than you. Most countries have laws against such predatory pricing, but who is to say anything? It is hard to prove. However, here’s how you can still compete with them.
Be Price Competitive As a Startup with Price and Costing Tips
- Play around with total pricing. If you sold stuff online that requires shipping charges, offer free shipping and build some or all of the shipping costs into your price. Free shipping is a great attraction for online shoppers.
- Offer greater value per product sold. You can offer a free gift or store credits which the customer can use to purchase something else. The value to the customer is i.e. $20, but your cost might only be $5. This is an excellent strategy to be price competitive as a startup and many (including me) have used it effectively. Who doesn’t love free gifts or rebate credits?
- If price is very sensitive in your industry, offer your product or services at the same price as your competitor. When doing your costing, identify all the indirect costs that will be lowered next time when you grow bigger. Then price your service/product while keeping in mind the cost reduction that will come once you hit the optimal procurement volume. For example your product cost might reduce 30% when you reach the minimum order quantity for bulk discount with your supplier. Or your delivery or shipping charges will become more efficient. If you provided services, perhaps your workers schedule will be filled up and make your labor costs more efficient.
- Adopt Activity Based Costing into your product/service costing process. Instead of allocating overheads equally among all your products/services, identify the labor component required for the preparation of these products/services. This will help you identify a more accurate costing and help you price your products more competitively. Accurate product/service costing is a crucial first step to be price competitive as a startup.
- Every cost counts, watch and manage your costing. Identify all costs that are non-essential and non revenue generating. Then determine if they should remain or be reduced. Cost management is vital for small business as you don’t have a large budget to buffer mistakes.
- Understand the nature of customer acquisition cost. Identify if there are any products you could sell at a great deal for customers, then profit over the life of recurring purchases. Companies selling printers adopt this strategy. Their printers range from $50-100 which is cheap but then they require you to buy their ink cartridge (to maintain warranty) which cost about $20-30 per refill. Obviously this strategy won’t work if your products have a long purchase cycle or don’t require any recurring purchases.