Times are tough and it’s tempting to slash prices to undercut the competition and grab market share. This strategy, often called the “race to the bottom” can appear as a quick and easy win. However long-term, this strategy can be damaging to your business, adversely affecting your profitably and deteriorating your brand. So, let’s look at what typically happens when you compete on price, before exploring how design can offer a better long term strategy.
Dropping your products sales cost introduces two fundamental problems to your business. On face value the simplest solution is to reduce your profit margin. However, to maintain your profitability, you’ll need a steady uptake in sales. To accomplish this, you’ll experience a hike in overhead, more marketing, more stock, more processing. Essentially, you’ll be working harder for less profit.
So now you’ll be thinking, OK, what if I keep the profit margin but reduce the cost price of the product? You can often negotiate better pricing by increasing the quantity you buy; however, this can be risky as it not only ties up working capital but means you are sat on large quantities of unsold stock. More commonly is to strip down products to their essentials. Less features, less material means results in a lower price. The risk with this is that product quality drops and you alienate your existing customer base.
The illusion of success – Short-term lowering of prices can attract a surge of new customers, giving the impression that the strategy is working. Routinely customers driven by price are fickle and lack loyalty, when your competition offer a better deal, they’ll jump ship.
Brand Damage – Offering constantly lower prices cheapens your brand, cheaper product typically results in poor quality. Once customers associate your brand with the low quality and cheap products it’s incredibly difficult to shake this perception, even if you do offer higher positioned products.
The unsustainable model – The ‘Race to the Bottom’ strategy is, by definition, unsustainable. There will always be a competitor willing to offer lower prices. Especially if they are working off a different business model or have lower overheads. The constant pressure of continually reducing costs whilst remining profitable creates and unescapable downward spiral which will ultimately leading to business failure.
Rather than focusing on price build a strong value proposition. This is where smart product design really gives you competitive advantage.
Enhanced Functionality
Well-designed products offer superior functionality, useability and quality. Solving customer problems effectively making them more desirable and justifying a higher price.
Improved User Experience
Products that are intuitive, enjoyable to use, and aesthetically pleasing create a connection with customers. Generating a positive user interaction with your products will help you with repeat custom and brand loyalty.
Improved User Experience – Design can be a powerful tool for storytelling. It can communicate your brand values, your commitment to quality, and your unique approach to problem-solving. This helps build a stronger brand identity and differentiates you from competitors.
Innovation and Differentiation – Design thinking can lead to truly innovative products that disrupt the market and create a unique niche for your business. This allows you to command premium prices and avoid competing solely on cost.
Cost Price Reduction – The Design Way – By focusing on the user interaction and quality of your products, it’s possible to rationalise cost savings within your current product ranges. By focusing on what’s important to your customers, irrelevant or out of date features can be deleted and material removed where it’s not needed. Modularity across your product range can also yield great results. The aim of this exercise is better product, less cost.
Rather than getting caught in the price downward spiral, focus on your customers and what they need and how you can add value. If you would like to know how you can leverage the power of design within your product offering talk to us.
