Don't undercut the market

It is hard to compete on price when you are starting a new business. Instead, compete on customer service, quality and your unique selling proposition.

Coins stacked

It’s tempting for a new food entrepreneur to fixate on price. The grocery store shelf is a competitive space packed with many diverse products within a given category. On launching a food product, it’s normal to look at the price of similar products. It’s important, even. It can also be natural to decide to compete on price by undercutting the established competition. However, this is a very high risk strategy.

Customer Value Relationship PhotoCustomers do not base purchasing decisions solely on price. They purchase based on value. We like high-value products that have a lot of benefits compared to the price (See: value equation). Sports cars are a higher value to most people. One comes with stylish design, high performance but also a large price tag. Some find fast food burgers to also be of high value. One may skimp on quality ingredients, but the cost of the product is less than the nutrition it provides for some people. Both products are popular because each has a high proportion of benefits compared to the cost of purchase. An entrepreneur needs to consider what benefits their product provides at what price.

A new entrant is unlikely to compete well as the low-cost supplier i.e. as the cheapest product that provides minimal benefits. Large businesses produce at economies of scale, enabling them savings of time and money. The Hershey Company, for example, will produce and package each chocolate bar on large-scale assembly lines, which are more efficient than a handmade item made in a shared kitchen. A large company can also use its volume purchasing power to negotiate savings on ingredient sourcing or product distribution. With lower costs of production, a big company can almost always win on price.

Thankfully customers purchase based on overall value, not just price. New food entrepreneurs can outcompete larger rivals at a higher price by increasing product benefits. This could include sourcing high-quality ingredients, using more premium packaging or creating a more personal customer experience. A company’s large size can even be used against it, like jujitsu. A smaller company can use targeted marketing messages specific to a locality, whereas a widely distributed national rival cannot. The trick is to use your unique competitive advantage to create a value-proposition that you can best deliver on.

A strong value-based product requires analyzing what your business does best. Who are your customers? What do they want in a product that is not being met in the market? What value can you bring to them? For guidance in positioning your product to compete well in the retail food sector, consider utilizing the MSU Product Center. The MSU Product Center is an organization that brings together on-campus expertise in the sectors of food, agriculture, forestry and natural resources to help entrepreneurs define and launch innovative products. Field-based innovation counselors advise entrepreneurs on business planning, regulatory requirements and product development needs. To access business development assistance, select the ‘request counseling’ tab on the MSU Product Center website or call 517-432-8750.

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