Almost every new online retail merchant makes the same mistake. They figure they can earn a lot of money simply by selling merchandise for a little less than the competition. They soon discover, however, that competing on price alone does not work. Every retail expert on the planet is well aware of the fact, but everyone seems to need to learn this painful lesson on their own.



If you made the mistake of trying to compete on price and price alone, don't feel bad. You're not the first, and you certainly won't be the last. Just stop doing it. If you need some convincing, that's what the first part of this article is all about. Here, you find seven good reasons not to compete on price alone.

1. The "Big Boys" will pummel you

The Wal-Marts of the world have a distinct advantage when it comes to pricing products to sell. Here's why:

* They can purchase in bulk at huge discounts. Small and independent online retailers usually can't afford to buy in such huge quantities, so the wholesale price you pay is considerably more than the wholesale price a major league player like Wal-Mart pays.

* Big stores can afford to sell popular items at a loss, because they know that if they can get shoppers into their stores, those shoppers are eventually going to buy products with higher markups.

Consider the Web browser war between Microsoft and Netscape. To take market share away from Netscape, Microsoft began giving away Internet Explorer. The browser war was soon history. If you wage a price war against a major retailer, you lose, every time.

2. The listing fees will kill you

You can really lose out on auction sites like eBay by trying to compete on price and price alone. After you pay your listing fees, shipping fees, and drop ship fee, you're not going to have much left. One return is likely to wipe out your entire profit on several successful sales.

3. Shoppers can quickly compare prices

Shoppers who decide to buy products solely based on who's offering the lowest price know how to comparison shop. The can go to Dealio, Google Product Search, Shopzilla, or a number of other comparison-shopping sites and see who's offering the lowest price.

Unless you really are offering the absolute lowest price on the Web, you're probably going to lose out in these situations.

4. You establish a profitless precedent

When you start off by offering the lowest prices, customers come to expect it. Unwittingly, you create a brand presence that includes an unofficial promise of offering the lowest prices available. That may drive business your way in the short term, but over the long haul, it will drive business away, especially if you decide to raise your prices later. When your customer loyalty is based solely on offering the lowest price, when you can no longer afford to do that, your customers will leave.

5. Many customers are not looking for the lowest price

Not all customers are bargain hunters. Many are hunting for quality customer service. Others may want the comfort of buying from someone who has a thorough knowledge of the product. Some just want a sense of belonging and community. When you compete only on price, you fail to appeal to this other market.

6. You train shoppers to buy on price

When you undercut the price of a competitor, you're sending a message loud and clear—buy from me, because I offer the lowest price. The customer buys and is rewarded like one of Pavlov's dogs. The next time that shopper is looking for a product, she's going to be much more inclined to buy from whoever is offering the lowest price... and that's not necessarily you.

7. You get discouraged

When you're offering bargain basement prices, you soon discover that you could probably be earning more money working the fryers at your local McDonald's.

You do a quick product search at some comparison shopping site and see that you can't possibly charge more than a $3 markup on laptop computer without pricing yourself out of the market. Worse, you discover that someone is selling the same laptop computer on the street for less than what you would have to pay for it wholesale!

How can you compete? Well, you're certainly not going to do it by simply offering the lowest price... not if you plan on running a profitable business.

Competing on price is certainly something to consider whether you're selling online or off, but it should play only a small part in your retail strategy. In Part II of this article ("Giving Away the Store, Part II: Competing on something other than price") Doba's Education Specialist, Jake Sabey, shows you other areas to compete in, so you can mark up your products enough to make selling them worth your time and effort.