Sometimes never compete on price

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By Jason Cohen on

April 6, 2025

Reading time: 12 min

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Sometimes never compete on price

by Jason Cohen on April 6, 2025

The difference between “low prices” as a race to the bottom or as a success story (like Amazon, Costco, IKEA, Vanguard) is in leveraging intentional weaknesses.

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“Never compete on price.”

So we are told. But customers want low prices, and it worked for Costco, Southwest Airlines, Vanguard, IKEA, Amazon, Walmart, McDonald’s, H&M, Dollar General, TJ Maxx, and many others. So why are we told not to use a low-prices to win?

When two products are fundamentally different⁠—in features, integrations, complexity⁠—customers often have no real choice between them. A large enterprise must use software with single-sign-on, security controls, compliance features, and the ability to scale to tens of thousands of users with roles and permissions and integrations with corporate systems.

For a small business, those features make the software harder to use. And no one wants to pay for things they don’t need. So, Enterprise- and SMB-targeted products differentiate on capabilities and user-experience, not on price.

But consider two products that solve the same problem for the same customer segment in largely the same way, with largely the same features. The sales team highlights minor differences that matter to maybe 10% of users. Each founder is certain that theirs is the Only True Way, but everyone else has a hard time distinguishing them. Price, then, is the last remaining thing they can compete on. They are two gas stations across the street from one another; the main difference is the number on the big sign.

So, one company drops its price by 20%, and starts winning market share. The other, having no other way to compete, does the same. This continues through “special offers” and permanent cuts and “branding” and kick-backs to influencers until there’s no profit left. Both companies end up poor, and in case your response is “Good! Companies are evil and don’t deserve profits!”, remember this also means they’re unable to invest in product development or customer service; thus the products and companies stagnate and then deteriorate, which in turn ruins the customers’ experience. Low price comes at a price, to consumer and company alike.

The math is even worse. A 20% price cut needs a 25% increase in number-of-customers to maintain the same amount revenue.1 It’s worse again with profit; even a seemingly-minor 10% price reduction can easily mean a 50% profit reduction2⁠—terrible!

Charging 80% of the price at 120% purchase volume multiplies to 96% of the revenue you had. Percentage losses always require even-larger-percentage gains just to get back to where you were. This asymmetric effect also appears in the math of becoming more productive.

Suppose the company charges $100 for a product and makes $20 profit after all costs. Reducing the price to $90 (a 10% price reduction) reduces profit to $10 (a 50% reduction from $20). This is exactly why established companies cannot compete on price on their main product, and thus is an Achilles’ heel for startups to exploit.

This math is why pundits (including me) constantly admonish bootstrapped founders to “raise your prices.” Low prices leave room for neither reinvestment nor profit. New founders price their products low for the wrong reason: They don’t know how to set prices, and they know their initial product isn’t very good, so instead of making it simple and lovable and winning a reasonable price from their ideal customers who would be happy to pay it, they sheepishly charge a low price, attracting the worst kinds of customers (the ones who can’t afford a proper solution, but occupy the greatest amount of time in tech support), and dramatically increasing the number of customers they must accumulate before they can quit their day job, all with no extra money for marketing or sales or design or product development. This is the wrong decision, made in fear and ignorance.

So, is it true? “Never compete on price?”

Well, no. Of course it can be an excellent strategy to have the lowest prices.

There are many examples of wonderful companies, with amazing products and happy customers, and even happy shareholders, with profits, growth, and longevity, where “low prices” is a critical strategic component.

Jeff Bezos famously quipped: “Your margin is my opportunity.” Meaning: While a competitor is extracting profit from some product, Amazon will sell the product cheaper, which either means stealing market share (if that competitor stubbornly maintains its price) or destroying the competitor’s profit (if that competitor matches Amazon’s price).

But why doesn’t this run into the problems we just outlined? Why is this smart for Amazon, but dumb in our hypothetical commoditized-market example?

Low price as a complete...