You have been in business for a long time, you have a reliable base of customers, and your organization is functioning well.  You may not be getting rich, but you are generating a comfortable income.  Then, gradually, your business starts to slow.  At first, you’re not worried… after all, short-term fluctuation is fairly normal.  After a couple of weeks of reduced sales, you start looking for answers.  And it does not take long to find the answer: your competition has dramatically cut their prices and is pulling your customers away.  Obviously this can be a frightening discovery, but there is no need to panic.  Below are steps to take when you are being undercut… or, even better, before the completion has a chance to undercut you:

Put yourself in a different class than your competition.  If you are in a sporting goods store and you see two identical shirts, how are you going to make your selection?  Clearly you will choose the cheaper of two identical options.  But now, stick a Nike logo on one and do not change the other.  How will that change your decision?  If you’re like most consumers, you are willing to pay more because of the power of Nike’s brand.  To protect your business from being undercut, you need make your products stand out among the competition like a Nike shirt among a rack of generic clothes.  Whether it is the packaging of your products, the quality of your service, or something else entirely, find a way to stand out.

Provide value to justify your higher cost.  We have established that customers are going to choose the cheaper of identical products or services.  But rather than dropping your prices to keep pace with the competition, first try to add value to the products and services you sell.  Simple efforts can make all the difference—quality customer service, for example, will entice many customers to pay a higher price.

Build customer loyalty.  The relationship you and your business have with your customers will often be enough to keep them paying your slightly higher prices.  So take every opportunity to improve this relationship.  From sending them gifts over the holidays to engaging them in conversation whenever they come to your store, the bond you build can be the difference between keeping them for the long haul or losing them to the competition.

If you are being undercut, it is important to react rapidly.  But it’s even better to take action before the competition can undercut you in the first place. Find a way to differentiate yourself, add value to your products and services, and build customer loyalty—and you will be immune to your competitors’ attempts to undercut your prices.