In my 15+ years as a customer experience strategist, I’ve watched countless businesses fall into the same trap. They’re facing pressure from competitors, struggling with sluggish sales, or simply trying to boost quarterly numbers—and inevitably, someone suggests: “Let’s just lower our prices.”
This knee-jerk reaction to business challenges represents one of the most persistent and damaging fallacies in modern business. As tempting as price cuts may seem, they rarely deliver the results executives hope for. Let me explain why.
The Multi-Dimensional Nature of Customer Value
When customers make purchasing decisions, they rarely consider price in isolation. According to research from Gartner, the B2B buying journey involves multiple decision-makers evaluating dozens of factors before committing to a purchase. Even in B2C contexts, the Harvard Business Review reports that customer price sensitivity varies dramatically based on perceived value.
In my experience working with clients across industries, customers consistently weigh multiple factors when making purchasing decisions:
- Service quality – How well will the company meet my needs? (For more on this, see our article on service excellence as a competitive advantage)
- Feature set – Does the product/service offer the functionality I need?
- Availability – Can I get it when and where I need it?
- Quality – Will it perform reliably and meet my expectations?
- Price – Does the cost align with the perceived value?
While price matters, it’s just one part of a complex value equation. I’ve seen premium-priced brands thrive by excelling in the other dimensions, even while competing against lower-priced alternatives.
The Competitive Response Dilemma
“But the other guy is doing it!” This refrain echoes through board rooms when competitors cut prices. And yes, in highly commoditized industries with limited differentiation, you may need to respond to stay competitive.
However, as the MIT Sloan Management Review points out, reactive price matching should be approached with careful analysis, not panic. Before matching a competitor’s price cut, ask:
- Is this a temporary promotion or a permanent change?
- Does the competitor have a sustainable cost advantage?
- Is the price cut targeted to specific customer segments we share?
- Do we have alternative ways to demonstrate value?
I recently advised a software company facing aggressive price cutting from a new market entrant. Rather than matching prices, we enhanced their onboarding process and expanded customer support hours—addressing key pain points their competitor couldn’t match. The result? They retained 96% of their customer base without sacrificing margin.
The False Promise of Volume
Companies that proactively cut prices typically believe increased volume will offset lower margins. However, this math rarely works in practice.
Consider a business with a 40% gross margin. If they cut prices by 10%, they would need to increase sales volume by 33% just to maintain the same gross profit dollars. According to McKinsey research, fewer than 15% of companies achieve the necessary volume increases to offset significant price reductions.
The One Cost Leader Reality
In any established industry, there can realistically be only one cost leader—typically the company with the greatest scale, most efficient operations, or proprietary cost advantages. Everyone else competing primarily on price is fighting for second place at best.
As Michael Porter’s competitive strategy framework established decades ago, sustainable competitive advantage comes either from cost leadership or differentiation. Attempting to straddle these positions usually results in being stuck in the middle—with neither the volume benefits of the cost leader nor the premium positioning of the differentiator.
I’ve witnessed this painful reality with a manufacturing client who slashed prices trying to gain market share against a much larger competitor. Not only could the larger company easily match their cuts (thanks to economies of scale), but my client’s brand perception suffered as customers began questioning why their products were suddenly “cheaper.”
The Psychology of Pricing
Understanding the psychological impact of pricing decisions is crucial. The Journal of Consumer Research has published extensive studies showing that consumers often use price as a quality signal. Lower prices don’t always trigger increased purchases—sometimes they create doubt about product value.
This phenomenon explains why premium brands like Apple maintain high margins even in competitive markets. Their customers associate premium prices with superior quality, design, and experience. Your pricing strategy should align with your desired brand positioning.
Building Value-Based Relationships
Instead of leading with price cuts, focus on building relationships based on delivered value. According to Bain & Company research, increasing customer retention rates by just 5% can increase profits by 25% to 95%.
I’ve helped companies implement voice of customer programs that identify exactly what drives loyalty in their specific market. This customer intelligence allows them to invest in the service elements that matter most while maintaining appropriate pricing.
A Strategic Approach to Pricing
Rather than reactive price cutting, develop a comprehensive pricing strategy that:
- Segments customers based on value perception – Different customers have different price sensitivities and value drivers
- Aligns pricing with your cost structure – Ensure you maintain sustainable margins
- Reflects your positioning strategy – Price in alignment with your brand promise
- Incorporates non-price value elements – Bundle services, guarantees, or support to justify premium pricing
- Regularly reviews market conditions – Stay informed about competitive dynamics without overreacting
Conclusion
Remember that your business exists to deliver value AND generate profit. While customers certainly care about paying a fair price, they understand that sustainable companies must maintain healthy margins. If you went out of business due to unsustainable pricing, your customers would simply be forced to go elsewhere—often to higher-priced alternatives.
Before reaching for the price lever, explore the many other ways you can enhance customer value perception. Focus on service differentiation, operational excellence, and building meaningful customer relationships. These approaches typically deliver more sustainable competitive advantage than the temporary boost of a price cut.
I’ve helped guide companies through challenging competitive situations for over a decade, and I can confidently say that strategic value creation always beats tactical price cutting. The fallacy of price as the primary competitive tool has undermined more business models than almost any other misconception in modern business.
What value elements beyond price matter most to your customers? The answer to that question—not mindless price cutting—holds the key to your sustainable competitive advantage.
