The Game of Prices – A Business Story

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I once heard a story about two businesses in competition. I am not sure the story is based on true events, but the lessons are instructive nonetheless.

The Story

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Business A is known for selling pure water on the “Busy Street”. It has been selling pure water for N5 for years now and has not had any meaningful competition all this time. Mr. John saw this as a great opportunity. Everyone needs water, right? So he decides to set up shop at the opposite end of Busy Street, but he struggled to attract customers.

After the first week of unsuccessfully selling pure water, Mr. John had a great idea. Since Business A sells pure water for N5, all he has to do is sell for less than that and let everyone know about it. So, Mr. John puts up a very large banner, advertising his pure water for sale for only N3.50. Before long, everyone starts coming over to his store, and business begins to boom.

Business A’s owner was furious. Who does Mr. John think he is? Business was not as good anymore because everyone now preferred buying from Mr. John. To get his customers back, Business A offered pure water for just N1.50 and put up an even bigger banner. The business had invested a lot in pure water and could afford to give this ridiculous deal if it meant running Mr. John out of business.

As expected, customers returned to Business A for their water needs. Mr. John was devastated. He had already invested so much into the business and could not afford to compete with the price that Business A was offering. When it became clear he could not compete, he had no choice but to close shop. Business A simply returned the price to N5 and everyone continued buying water the same way they have for years.

The Lessons

There are a couple of lessons I picked from the story above that I will like to share with you. I hope you find them instructive:

1. Pricing is not always the best strategy.

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Attracting new customers is not always easy, especially when you are in a competitive market. The most popular strategy most new entrants employ is to sell at a lower price. As the story has shown, this is not always the best strategy.

Lower prices attract more customers. But this potentially means you get less revenue. For instance, if you would get 100 customers by selling a product for N200, you need a minimum of 200 customers to get the same revenue if you sell at a reduced price of N100. You may also incur more cost to sell to more customers, so that may require you to sell to even more than 200 customers to get the same result.

Another challenge with reducing prices is that the market may react. When a competitor sees that you have lowered your prices, there is a chance that they would also reduce their prices in response. This can lead to a pricing war where everyone tries to win the other by reducing prices. Who wins? The customer. In many cases, especially if the pricing war lasts for long enough, the businesses earn less and less. This is definitely not good for everyone.

And finally, if one of the competitors is a bigger player, they can actually sell at a lower price even if it means they incur loses just to bully out the competition. This is exactly what happened in the story. Mr John was easily bullied out of business by a bigger competitor that could offer much cheaper prices for much longer.

The point here is that you need more than cheaper prices to attract customers to your business. Check out point two.

2. Be Unique.

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Starting a business is hard work. What do you sell? Who do you sell them to? How do you sell them? Naturally, one of the best ways to know what to sell is by checking what others are already selling. Look around you, pick up some useful data and then you replicate. Easy, right? Not so easy. The question really is why should people buy from you?

Many people simply replicate what others are doing. This works in some cases where the competition is not aggressive or where the market is very large. But as the market begins to grow smaller, it becomes increasingly important to make your business unique. There should be something unique about what you do.

Remember that people have choices, but you want them to do business with you. You can decide to sell something a bit different. In the story, for instance, Mr John could have decided to sell bottled water instead. He is still selling water but to a different audience. Or you could decide to sell the same product in a different way. For instance, Mr John could start offering customers the opportunity to buy water online and it would be delivered to their doorsteps. He could even find other items that complement pure water to offer to the customers.

The important thing is that you need to identify how to distinguish your business from that of your competitors. There should be a reason why people prefer to do business with you instead. Think about this. Do you have a favorite store you prefer to buy things from even though there is another one just beside it or even closer? They have probably made you a loyal customer. That is exactly what you need to figure out.

3. Location is everything.

The location of a business determines the kind of customers the business will attract. The location also determines the visibility the business would get. For instance, a business located on a busy street will get more visibility than a business that has a shop on an isolated street. For businesses that require a lot of walk-in customers, this can be a big deal.

One other important factor that should determine the location of your business is that it also determines your competition. When choosing your location, you need to check out the competition there. If your strategy is to be an aggressive competitor, then you first measure yourself up against your competition to be sure you can withstand the battle. If not, you confirm that there is more than enough market to avoid aggressive competition. And if the market isn’t big enough, then you try a different location.

Mr. John chose to be an aggressor but he picked the wrong location and competitor. That wrong judgment led to Business A kicking him out of the business before he had even started. Maybe if the market wasn’t saturated, he could sell at the same N5 and get a share of the market without being seen as a threat by Business A. Except if Business A is aggressive and wants all the market. You need to understand your competition.

Your location may also not be physical. Depending on the product or service you offer, you may need to get online as well. This expands the reach of your business and attracts a wider range of customers. To be successful online, however, you need to get your strategies right, but that is a story for another day.

So, what do you think? Do you agree with my points on the story I shared? Do you have any other thoughts on this? I would love to hear what you think. Please share your thoughts and ideas in the comments below and don’t forget to share on social media as well.

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