All of us, at one time or another, are confronted with a low-cost or low-price competitor. The solution isn't to lower your prices and engage in a price war, because the result is lowered profitability for everyone involved.

So, what can you do to compete?

Before you decide on your strategy, you need to do some research, which should begin with both an objective analysis of where you stand in relation to your competition and an analysis of market needs and preferences.

Use the results of your research to determine what segments you serve and which ones the low-cost competitor serves, to better understand whether you are serving the same segment of the market or different ones.

If you are truly serving different parts of the market, then stay the course. But if you believe the low-cost competitor will eventually enter the segment you serve, now is the time to prepare for when this competitor and you are attempting to win the same segment.

The best defense is a good offense

In 1799, George Washington wrote that "offensive operations, often times, [are] the surest, if not the only (in some cases) means of defence." That approach has been applied to various competitive theaters, including business.

The following five tactics will help make sure you'll have a fighting chance against competitors.

1. Differentiate from low-price competitors

Differentiation is your first line of defense. It is fundamental to long-term success. Differentiation is defined as finding a significant point of difference that facilitates a sustainable competitive advantage. It is at the heart and soul of your positioning.

2. Be customer-centric

Clearly understand exactly what your customers want and what they will pay for. Focus your efforts on excelling in those areas of demand. Customer-centric marketing requires placing the customer at the center of your marketing strategy in an effort to create and extract customer value. It is the essence of enabling Marketing to serve as a value creator. Don't guess. Ask. Invest in voice-of-customer research, win/loss analysis, and customer advisory boards.

3. Price based on value

Value-based pricing is based on understanding the overall value of an offering to any one buyer. Establish a solid pricing process that will enable you to differentiate your pricing across distinct market segments. Understand how you create value for your customers and what that value is worth. Of course, do everything possible to bring your costs in line with the level needed to compete effectively and to support the innovation and development you are pursuing.

Differentiation, the right product and feature set, and the price initiatives must be executed simultaneously.

Rather than lowering the price on your product, which may be better than the competitor's but more than what the customer needs, you may need to develop a specific product that will compete head-on with the competitor's product that you can provide at a lower price point. It will be important to do so in a way that won't cannibalize the rest of your product portfolio.

4. Create a low-price subsidiary

Consider creating a low-price subsidiary or finding a partner that has a low-price offering. This strategy will be successful only if you will become more competitive as a result of having set up the low-cost subsidiary. And for this approach to work well, some basic principles must be followed.

A successful low-cost subsidiary strategy requires that the low-cost subsidiary use a separately recognizable brand name, with a limited product offering, intend for the sole purpose of competing with the low-cost competitor. The idea is to change the expectations of the subsidiary's customers to reflect the lower service levels or fewer product benefits and features that come with the lower pricing.

Focus on the specific needs of the market and limit the efforts of the subsidiary to only those that are necessary and sufficient to make it profitable. Do not include all the services and accommodations that the parent company can offer.

In addition, to reinforce the differences, the lower-price subsidiary needs to be segregated from the higher-price parent.

If you take this approach, you must launch a subsidiary with the idea that it is a real business that must make a profit. If the subsidiary simply occupies the space opposite a low-cost competitor, but is not intended to make a profit, it is highly likely that it will not make a profit. It will end up being a drag on the parent at a time when it is most difficult for the parent.

In short, if you decide to take this approach, the subsidiary should actually be able to compete in the market with its parent as well as the other suppliers in the market.

5. Sell a solution, not a product

When several low-cost players enter a market, the result could be the commoditizing of the products in question. Be prepared for that possibility by thinking in terms of solutions rather products.

Integrate products and services into a single offer. Services are much harder to evaluate on an apples-to-apples basis. In addition, services provide a vehicle for developing a deeper understanding of your customer's business. It is much harder for low-price competitors to offer solutions. If you don't have the ability to provide the services, find a partner.

* * *

Beyond those five strategies there are other tactics you can use to offset a low-price competitor. The key is to take action and not stick your head in the sand.

Research by Nirmalya Kumar, a professor at the London School of Business, found that "ignoring cut-price rivals is a mistake because it eventually forces companies to vacate entire market segments." If you are in that situation, the various links in this article will help you get started on resolving the problem.

More Resources on How to Compete with Low-Price Competitors

How to Win a Price War (And Prevent Future Ones)

Pricing: MarketingProfs Training Course 

SEO Pricing: How Much Agencies and Freelancers Charge

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image of Laura Patterson

Laura Patterson is the president of VisionEdge Marketing. A pioneer in Marketing Performance Management, Laura has published four books and she has been recognized for her thought leadership, winning numerous industry awards.