The Effects of Competition on Price
Imagine it’s the summer, and you’re sitting cozily in your lawn chair on the side of Main Street in your hometown, watching the Fourth of July parade. You are with your family, the sky is blue and the sun is hot, assembling all the necessary ingredients for a perfect holiday. Although thoroughly amused at the colorful floats passing by and marching bands playing patriotic tunes, you begin to get thirsty. For whatever reason, there are no stores nearby and you have forgotten to bring any water.
As your desire for water becomes more and more pronounced, you begin looking around for possible options to quench your thirst. Fortunately, along comes someone pulling a little red wagon carrying a cooler, selling ice cold bottles of water. Price per bottle: $2.50. Somewhere in your mind you acknowledge that at one of the big box stores you can buy at least a dozen bottles of water for that price, but the demands of your thirst quickly squashes any rational thought. You reach for your wallet or purse and as you do, your imagination dances with delight over the thought of the cool liquid cascading through your body. Just before handing over the cash, however, you notice another vendor, selling the exact same bottle of water for $2.
All things being equal, the decision of where to buy your water is easy. Where previously there was only one option, now there are two. The decision-making process now turns to the first vendor, who is selling his water for $2.50. He essentially has two options. He can either go sell his water somewhere else, (This is known as being priced out of the market) or he can lower his price. Even at $1.50 or $1.75, there’s still a fair amount of profit margin for the budding entrepreneur, so lowering his prices is a likely option if he wants to remain in business.
Competition Benefits Consumers
While the principles of competition can be very complex and differ in various markets, the simple analogy illustrates a very powerful concept. Many times, we as consumers are benefited as we find ways to bring competition into the market for the products we buy. The better you understand this concept and use it to your advantage, the farther your dollar will go.
In today’s modern world, we regularly utilize Internet sites that aggregate competitors’ prices for us. For example, Orbitz.com and Travelocity.com bring together prices from various businesses for travel arrangements. Carinsurancerates.com provides us with side-by-side comparison of car insurance policies and BillShrink.com shows us quotes for multiple cell phones and telephone providers.
Utilize Price Matching to Save
Beyond Internet websites, where else can we implement the strategy of bringing competition into the market?
Something we all purchase on a very regular basis is food from supermarkets. Bringing competition into the market for groceries is known as price matching. Make a list of the best prices from each of the grocery stores as seen in their circulars, in the newspaper and in advertisements. Instead of going to each store in pursuit of their best priced items, take your consolidated list from all the supermarkets to one, and ask them to lower their prices to meet their competitors.
Do you go to the same place each month to get your hair cut? No doubt you have established a relationship with your stylist or barber and enjoy the experience of catching up. However, if you are paying $15 a month for the haircut and see a competitor advertising haircuts for $12, bring the ad in and ask them to match their competitors price.
What about with auto mechanic services? If you take your car into the same place regularly for work, but you see a competitor advertising a discounted price, ask if they will match it.
What are other creative ways to bring competition into the market to lower the price of products you purchase?
Here are some of the places I have had success:
- Telephone and Internet Service
- Carpet Cleaning
- Tree Trimming Services
- Dental Work
- Interest Rate on Mortgage
- Purchasing (and selling) Used Vehicles
These are just a few examples. Fundamentally, a business’s objective is to generate profits. However, generally they would prefer to discount a service to you and retain you as a customer, than lose you to the competition. Best of luck and keep this in mind as you make efforts to extend each dollar you spend.