Low Prices Are A Business Death Sentence

Do you know how Wal-Mart wins the low price war in retail? They buy a ton of product from their vendors so they get the lowest price possible and they make a razor thin margin on everything they sell.   They have great analytics so they know the products that sell and in what quantity. They know this information better than the people who manufacture the products. They provide a bare bones experience in their stores to keep expenses low. Wal-Mart has no margin for error and they run an operation based upon strict rules designed to maximize efficiency.

Wal-Mart has developed a culture to facilitate driving costs as low as possible and selling products as inexpensively as possible. They rely on being the low cost leader as their competitive advantage.

Since 1962 Wal-Mart has dominated every market they enter using this philosophy. Whether you are buying paper towels or televisions they are your first stop (and usually your last) if you’re looking for the lowest possible price.

Every market, every industry, has a company trying to be Wal-Mart. Few can execute with the precision and consistency of the retail giant.

Without Wal-Mart’s buying power, analytics, cost reduction systems and culture, a low cost competitive advantage is a recipe for disaster.

Why?

A customer (or client in a service business) who selects a provider based upon the lowest price is never going to be loyal. He or she will always go where the prices are lowest. If a new, well-financed competitor enters the market he can lose money until he drives all other low-price providers out of business.

If you are an entrepreneur or a lawyer or any type of business owner you must build a business model that creates a competitive advantage not dependent upon price.

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Here is the transcript of this episode of Four Minute Fixation:

Low Prices Are a Death Sentence

What kind of a lunatic hangs out in front of Wal-Mart on a Saturday? Your kind of lunatic. Come with me.

Hi, I’m Dave Lorenzo, and today, I’m fixated on how you price your services. That’s right. I’m hanging outside of Wal-Mart mainly because they wouldn’t let me film inside of Wal-Mart. No. I’m hanging outside of Wal-Mart because I want to prove a point to you. Wal-Mart has a phenomenal low price strategy and they dominate the retail industry on everything from toilet paper all the way up to high end televisions. You probably can’t find a lower price on any item at any store that will beat Wal-Mart, and that’s their strategy. The strategy works really well for them. It will never, ever, ever work for you, and here’s the reason why.

Wal-Mart has phenomenal pricing power. They buy stuff in bulk. They have phenomenal power when it comes to buying products, so they can buy their products in bulk and they know they have phenomenal data as well. They know what sells and what doesn’t sell. They can go to manufacturers or wholesalers and say, “We will move X-quantity of product and we can buy it in bulk, so we can sell it for the absolute lowest price. You need to provide it to us at the absolute lowest price.

This doesn’t work for you because you, if you’re in a business that has products, can’t buy your goods, you can’t buy the raw materials to make your products at the cheapest rate possible. If you’re a service provider, the cheapest rate possible is the exact way to run yourself right out of business. You need to focus your pricing strategy on delivering value, not on providing the lowest price possible. Any time you try to compete with someone on price, it’s a race to the bottom, and unless you want to compete with these guys right here, there is absolutely no way you should ever be the lowest price provider.

In fact, I would encourage you to try and find ways to increase the value you provide to your customers, to your clients, so that you can be the highest price provider, providing the greatest overall value. Here, low prices are just the beginning. There, low prices are the ending. Don’t be a low price provider.

I’m Dave Lorenzo, and that’s what I’m fixated on today, standing out here in the hot sun on a Saturday in front of Wal-Mart. I’ll see you next time on the Four-Minute Fixation.

Here are three other resources you can use to position yourself and your business for success:

The Awesome Power Of Consistency

If you can consistently deliver a great experience for your clients, you will be able to create enough value to make price irrelevant. This episode of Four Minute Fixation will help you defeat anyone with a low price strategy.

How To Make Better Decisions

If you make great decisions you can deliver a better experience to your clients. Providing a great experience is another way to combat a low cost provider in your industry or market.

How To Get Your Marketing Message Through

Getting through to your customer is half the battle in marketing. This episode of Four Minute Fixation will help you connect with your client so he recognizes the name of your business and the service you provide.