The pandemic is causing small businesses to drop their prices. Here’s why that’s a terrible business strategy

Whenever times get tough, like a global financial crisis, major international terrorism attack, political turmoil or even a global pandemic, business tends to go through a range of emotions and reactions, figuring out how best to cope. For small businesses, uncertainty can often lead to a knee jerk reaction of dropping prices to give a perceived market advantage as customers get thinner on the ground. 

For some businesses though, their entire strategy has always been to be the cheapest, regardless of what is happening in the world around them. Personally, I don’t think being the cheapest is even a strategy. It’s more of a choice that business owners make when they don’t have a better idea or a more creative pricing alternative. The thinking is that if they are cheap they will attract plenty of customers, which they may well do. But are they the right customers? Will you make any money out of these customers? And will you just end up making lots of sales that are little more than profitless volume? 

During the pandemic I’ve had many conversations with business owners about pricing, doing my utmost to convince them to move away from the price driven model. My argument is that we live in a world that is value driven more than it is price driven. Often it just means we need to find better customers. But I have to start by convincing business owners that being the cheapest leads to many problems, best summarised by these five key observations.

1. Price driven businesses are generally the first to go belly up when there is a major issue

Over the years, I’ve worked with many different types of businesses, in all kinds of industries and in all parts of the world. One major observation that I’ve seen, time and time again, is that the minute there is any kind of significant issue, like a global financial crisis, a natural disaster or even a pandemic, those businesses that promote themselves as being the cheapest are the first to go bust. They simply lack the resources to get through any kind of financial hiccup.

2. The shallow end of the pool is always the most competitive 

Strangely enough, the cheapest end of town is also the most crowded end of town. Why? Because many businesses lack imagination, they are lazy and they don’t understand how flawed the price-driven strategy actually is. If they have no other compelling points of difference or really solid competitive advantages, all they have left is price. Next thing they find themselves fighting it out with a pile of other cheap competitors, none of whom are making any money. Swim in the deeper part of the pool, and often you’re the only one there!

3. There is no loyalty when you’re only competitive advantage is being cheap

One of the biggest problems with the “being the cheapest” model is that the customers we attract are always on the hunt for the next business that will do things cheaper. There is no real loyalty when you do business in this space. Clearly, this can mean your business is incredibly vulnerable because there will always be another business prepared to do what you do for less. That can mean waking up with no customers.

4. It’s exhausting running a business that’s always hustling to make a dollar

Now don’t get me wrong, in the early startup stage of a business, half of the excitement is the hustle. It comes with the territory, but believe me, after a while, it’s just plain exhausting. Always putting all of your energy into finding cash for the never-ending pile of bills, pushing to make ends meet and that constant push/pull feeling of slowly moving forward. The cheaper your prices, the longer the struggle will be, if you make it at all. 

5. Cheap customers attract cheap customers

Cheap customers tend to have friends who are cheap. They refer cheap products, services and businesses to each other. So if your business is promoting itself based on price alone and attracting cheap customers, you will only ever get more of those customers who only care about price. This of course keeps all of the negative stuff that I’m talking about spinning in a vicious, never-ending cycle. 

The bottom line, being the cheapest is a very tough place to do business regardless of what’s going on in the world. It’s hard to survive, it’s hard to build a resilient and significant business in this space. Charge what you’re truly worth and you’ll get to where you want to go much faster and in much better shape. You’ll be able to ride out the next pandemic, natural disaster or economic downturn.