Roger Martin put it well in his Harvard Business Review blog. It translates well for small businesses.

He is right – whatever the new faddy idea, it’s still either lower costs or a differentiator that works to provide competitive advantage. Nothing else.

Lower costs can lead to more market share and an overall better result. Most small businesses focus on driving down overheads, which commonly can only be done effectively once, and then view sales price as the limiting factor to gaining more business and so they tend to be more price sensitive than their customers are. Commonly, small businesses don’t put their prices up enough or often enough. They might put off a customer, even if that is one that causes them immense effort to service.  We’ve got a whole seminar on pricing for profit – you just have to ask for the notes.

In lower cost models, customer see no difference, because these measures are all internal, and firms have to be considerably cheaper in their cost base to be able to compete. Most small businesses do not have that ability, and simply trying to compete on price means leaving money on the table in every deal and restricting the business’ ability to grow or even survive.

Whether the business owner knows it or not, they have made a choice, and unfortunately, it seems that quite often that choice is implicit and they do not always recognise the consequences.

These price and cost issues mean that if your focus is on your competitors, it is they who are effectively deciding your prices and therefore your profits. It is unlikely they will have your best interests at heart, and also competitor facing strategies mean that the business is not customer facing. As customers are the ultimate arbiter is of whether you succeed or fail in business, this is a dangerous strategy.

The other strategy is one of differentiation. It is where you position yourself to be different in some meaningful way – or at least a way which you hope customers will find meaningful – to your competitors.  We have ways of discovering this, so you are not just guessing. You are inviting your customers to make a trade-off between the perceived difference and the price. It is probably the only sensible strategy for any business which has a small market share and cannot grow that share very quickly. Usually to grow market share quickly involves a fair level of investment, which for most small businesses is not possible.

Differentiation has been discussed in some of our other blogs, and it is the way to maintain gross margins and grow the business sustainably. It is also customer focused, and any small business which is not customer focused must expect to be out of business fairly quickly.

Other models have been proposed – Roger Martin mentions the two sided market model as an example. Credit card companies use this, so does eBay. It’s simply where they gain a revenue stream from both purchases and vendors. It’s been argued that this is a new competitive strategy, but that begs the question – why cannot someone just copy it and then surely you are competing on costs and differentiation again? So don’t be fooled by another management book promising you a quick route to success because they have a new model. They probably haven’t. Test it against costs and differentiation and you will probably find that it’s another variation of one of those.

In the digital age small businesses can compete very effectively over larger markets than before, and they should always bear in mind (as should large businesses) that customers are more discerning and require a more personalised solution to their needs. Small businesses are better suited to delivering this, and in delivering this they are clearly producing a differentiator which they can exploit. They don’t have to be stuck with a cost based competitive solution. Again, we’ve got plenty of ways of showcasing the difference and justifying price.

Small businesses can also collaborate much easier. We deliberately look for strategic partnerships for our clients so that they do not have to build in all the overhead to do a new venture but can share resources in noncompeting fields. Each member of the partnership can bring what it is good at to the table for everybody’s benefit. In this way, small businesses can compete better with large ones when they need to.

So don’t get stuck on cutting overheads and cutting prices when it’s not that difficult to find differentiators that customers will pay for. And also remember those differentiators will make sure those customers remain sticky – that is stuck to you.