Why Your Competitor Can Afford to Charge Less

One of the most elusive choices a UK business owner can make is the pricing. Charge too much and you will lose consumers. set it too low and profits will dry up. However, time and time again, you will find that your competitors will be able to undercut you, and yet still survive; and in some cases even prosper. It is not always cut-throat pricing or slim profit margins. In many cases, it boils down to something much more intangible: financial transparency made possible by more intelligent systems like online bookkeeping services.

The Pricing Illusion: Not Always Cheaper

On the surface, it may be tempting to think that the competitors charging lower prices are doing a bad job or are making a loss. More frequently than not they have a better grip on their financial reality than most small business. They can tell you precisely what they cost, where they see the cash moving and what level of margin they can trim without jeopardizing the business.

This degree of accuracy is not specular. It is based on the availability of financial information that is current and accurate rather than trawling through spreadsheets near the end of the month. As your competitor is seeing its numbers on a daily basis, he/she is able to decide in hours where others take months to calculate. It is that dynamism that enables them to price strategically as opposed to fearfully.

How Visibility Becomes Advantage

Taking the example of two cafes owners in the city of Manchester. The two shops are of the same size and deal with more or less the same customers. One of the owners keeps the records manually and reviews profitability wholly after every quarter. The other has an optimised system, possibly relying on online bookkeeping services, which displays, in real-time (or close to it), the actual cost of ingredients, labour, and overheads.

The discrepancy is radical. The original owner believes that each sandwich that is sold is equally profitable. The second owner makes out that chicken sandwiches are 18 percent more expensive to produce than tuna sandwiches after including secondary costs. Armed with that information the second cafe nudges up prices slightly on menus and offers, ensuring the business still makes good profits but is also able to keep some items cheaper, to ensure customer flow through the door. It appears to the outside observer like undercutting. It is in fact data-based pricings.

Cash Flow: The Silent Weapon

It does not only involve profit. The timing of cash, that is, when the money comes in and when it goes out, can ruin or make pricing decisions. When a competitor is aware of the fact that the client is paying client invoices in good time, he may be willing to receive low margins since the cash is flowing smoothly. A different business that consistently gets caught off guard because of late payments, uncertainty and a lack of visibility in forecasts, cannot afford to reduce their price, even when demand suggests that they should.

Late payment culture continues to be a big problem in the UK and SMEs are particularly affected by it. Reports indicate that about a third of the small companies face cash flow challenges because of slow invoicing. The best of businesses can reliably survive this storm who are not flying blind. They are able to know, weeks ahead the state of cash positions and then, they can then price accordingly without worrying.

Psychology of Confident Pricing

It has also got a psychological layer. More times than not inexperienced business owners run to charge defensively leaving an additional margin cushion in case. Paradoxically, that cushion at times puts them out of opportunities. Rival organizations experiencing financial transparency do not require such a safety net; they are confident in their information and they are unafraid to take risks.

The customers see it quite simply, either one provider appears cheap, the other expensive. However, behind the curtain it is not practical exactly a race to the bottom, but it is a race to become more financially intelligent.

The Takeaway

When looking at a competitor you notice that they are charging less do not instantly assume that they are cutting corners and operating with a reckless disregard. Better still, they’re equipped with a more keen financial insight that you lack. They have the precise knowledge of which goods or services they can charge thinner margins, to which customers payment checks are sure, and where they can sacrifice without pain.

The moral of the story is not to cut prices to the same level. The lesson is to be able to develop the same comfort out of your numbers to make pricing a strategic decision instead of a desperate gamble. That confidence, more and more, is born of the sort of transparency achieved by online bookkeeping services, transparency that turns undercutting into a managed risk rather than a reckless strategy.