WHY TOP COMPANIES NEVER COMPETE ON PRICE
By Ethan Williams
AI and GenAI vendors have embraced value-based pricing strategies, with over 50% combining them with usage-based models to maximize value. Successful companies prioritize their products' and services' actual value to customers rather than competing solely on price.
The Pitfalls of Competing on Price
This pricing approach works particularly well in markets with quality differences, such as SaaS, luxury goods, and B2B services. Value pricing strategies enable businesses to align with customer needs, maintain pricing control, and differentiate from competitors.
Rather than defending prices, businesses should implement strategies to focus on the value delivered. Below, we explore why leading companies avoid price competition and how they maintain strong profit margins.
Why Price Wars Destroy Value
Competing on price alone can be detrimental to long-term success. Price wars:
Train customers to wait for discounts
Erode brand value and quality perception
Reduce profitability across the industry
Hinder innovation by limiting revenue available for reinvestment
Many businesses in commodity markets find that price wars lead to shrinking margins, making it difficult to sustain growth.
The Competitive Edge of Value-Based Pricing
Aligning prices with customer benefits offers strategic advantages. It helps businesses differentiate by emphasizing their unique value proposition. Customers who understand and appreciate the value received are more likely to remain loyal, reducing churn rates and increasing lifetime value.
Moving Beyond Cost-Plus Thinking
Traditional cost-plus pricing limits profit potential by focusing on costs rather than customer willingness to pay. A value-based approach, by contrast, is rooted in a deep understanding of customer needs and market trends, allowing for rapid adaptation to shifts in demand.
Shifting to a Value-Based Pricing Mindset
To succeed in today's competitive market, companies must shift from cost-plus pricing to value-based thinking. This change ensures businesses capture the true worth of their offerings rather than setting prices based on production costs.
