Do not compete on price, unless...
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There was an interesting article about a new start-up company called AutoSlash in the New York Times this past weekend. AutoSlash says they will get you the best price on a car rental by constantly checking for better deals even after the reservation is made. What caught my attention was how many of the auto rental companies had decided to allow AutoSlash to work within their reservation systems and coupon systems to deliver these low prices.
This seems like an interesting move. I can understand why the low dollar rental companies may want to pursue this, but one company that is connected is Hertz. Given their reputation for being on-premise and having covered parking for the cars among other ammenities, it just seems odd. Maybe they figure that in a tie on price they will win the business?
For a new business starting out or a business trying to grow, competing on price does not make sense long term. Sure, you can use price to bring new customers into your business, but only if you think you can keep them over time for repeat sales or sell them something else while they are there. Walgreens is famous for this strategy. They will discount something heavily to get customers to the store but they make up for their loss leader sales with other purchases.
Competing on price alone signals to the customer they should always expect the lowest price. While this will win you some business, you will have a harder time keeping your customers long term. A price-only buyer does not tend to be a loyal customer.
Use price where needed to bring customers into your business. But when doing this, make sure you know you will keep them over time at reasonable margins or sell them other items that will make up the margin hit.