For many locally owned businesses, few threats loom larger than the specter of an effective value competitor.  Big-box chain stores, franchise operations, and the Internet have all made it easier for motivated consumers to shop around for the best prices. This state of affairs has in turn hastened the demise of many smaller businesses that can’t compete in the bargain-pricing game.

Value competition isn’t restricted to retail. Businesses of all sizes can wake up on any morning to find that its prices for products and services have been drastically undercut by a competitor. Here are a few truths every company should consider before facing off on price.

Truth #1: Value competitors should not be ignored.

Dismissing a value competitor as providing inferior-quality products or substandard services is a huge mistake. To the contrary, budget pricing doesn’t necessarily equate to poor quality. It’s just as likely that a competitor’s lower-priced product reflects more efficient manufacturing and distribution channels or greater pricing clout with vendors.

Even if it doesn’t, you need to recognize that certain segments of the market – including some of your own customers – are willing to accept a lower level of quality in exchange for a better price.

Seize the opportunity to learn from these competitors. There’s a good reason behind their success and it’s called the customer. The most effective value competitors are adept at identifying and providing only those features and benefits that their customers truly value.

To compete successfully, companies must continually revisit their understanding of value from their customers’ perspective. Doing so may result in the need to introduce a competitively priced product line for specific market segment, or it could mean paring down product lines to focus instead on higher-end products. The right response lies in knowing what your customers value.

Truth #2: Price is not everything.

Of course, no matter what they say, most buying decisions are not driven by price alone. Your customers may be willing to pay more or drive farther for services or features they deem valuable.

Value-added services can take a variety of forms. It may mean having more knowledgeable employees, offering customization, or specializing in a specific product category. Whatever the strategy, value-added services allow companies to differentiate themselves and create more intimate customer relationships. The results are higher levels of customer trust and loyalty that no amount of discount can steal away.

Truth #3: Price wars are often lethal.

Small businesses that try to compete with larger companies on price usually end up losing. They simply lack the bulk purchasing power and margins.

But smaller companies can emulate big, low-priced competitors in other ways; namely, by embracing efficiencies and eliminating activities that add costs to their products, but not value (as defined by the customer). In the end, competing effectively means keeping value propositions relevant and activities aligned with what the customer truly values.