It is inevitable that at some point, you will have to deal with a new competitor trying to enter the market or disrupt the industry. How you deal with this is imperative to the survival of your business.
When responding to new competitors, I highly recommend avoiding the knee-jerk reaction of trying to compete on price, if possible.Lewis Hurst
New competitors will invariably try to poach customers by offering their products at a lower price. This is because they have to have some reason for people to look at their products when customers are already perfectly happy with the incumbent product. Even if the new product is better, people often aren’t interested if what they have already works for them.
Inevitably some customers will be lured by lower prices, try the products and move to the new competitor. The natural response to this is to reduce your prices to remove the incentive for customers to try the competing product.
The problem with this is that you have a business to run. You have costs to cover and profit to make, the new competitor does not. If their business fails, they have lost only their time. Also the lure of a new business venture will be enough that they are probably happy to give all their free time to make it work (probably while they support their living costs with a job elsewhere) – so they have no value on their time. They may also have some upfront cost of investment that they are using as justification to make the business work at any amount of effort, and they won’t have ongoing costs such as staff to consider. All of which justifies the new competitors business decisions, despite those decisions making no sense in the business world.
Consequently if you compete against them on price, you will drive the price down and down until it’s unprofitable for you to run the business, and your competitor will succeed because their mindset will be to make the business successful whatever the cost (and they’ll be measuring success by customer uptake, rather than profit). The result will be that the industry is not worth the effort to compete in. This is bad because it stifles innovation, quality, functionality and other things that consumers benefit from.
A better way to respond to new competitors is to compete on things other than price, such as quality, functionality and service. Obviously this depends on what you’re selling – if you sell nut’s and bolts, and someone else sells nut’s and bolts cheaper, you’re probably going to be competing on price (assuming you can’t create barriers to entry, such as contractual agreements with suppliers).
Competing on quality, functionality and service is good because you can keep the profit margins required to make a successful business, while providing things a customer wants. Because you’re providing things a customer wants, you may even be able to charge more, and thrive despite the increased competition.
If for example, you sell accounting software and a new competitor comes along with a rival product, instead of competing on price, add new features that the customers want. A customer would rather pay more for a product that does what they want and makes their life easier, than pay less for a product that doesn’t quite do everything they want.
In reality, you will probably lose some low value customers to the discounted product, but this is acceptable loss compared to the alternative of competing on price.