One of the questions I received last week was "how can I be more competitive?  I've dropped my prices so low there's no profit left".

Every business seeks competitive advantage (CA).  Michael Porter, from Harvard University, said in 1985 there are only two sources of CA - cost leadership and differentiation (it took him 400 pages to say it though).

Cost leadership is nearly impossible for a small or medium business.  So, why then do so many small businesses compete on price?  It does not make much sense for competitors to keep dropping prices until they are all broke.  (For example, Qantas/Jetstar and Virgin airlines).

On the other hand, differentiation can come from a better product, or through product or service innovation (think Apple), although this is only an advantage for a short while until there are similar products available (then the price war starts again).

What Porter meant was that you must find out what is valuable to your customers (easy, ask them!), and then communicate the value of what you do to prospective customers.  This is the easiest source of competitive advantage for small business.

Jack Welch, of GE fame, said advantage comes from learning about your customers needs faster than your competitors do, and then turning that knowledge into action faster than the competitors can.

It turns out the person who asked me the question saves customers up to 40% on the design and construction of an owner-build home.  If I was a buyer, I really don't care about their fee anymore, the value to me from saving 40% is far more important.  (This also becomes the business' Value Proposition and it would be a powerful selling tool on the website, stationery, business card, etc).

What problems do you solve for your customers?  How are you doing it better than others?  Do you know what your customers want or need?  (One way to do this is with a searching SWOT analysis - Strengths, Weaknesses, Opportunities, Threats).