Question

One of the most common errors new foodservice operators experience is pricing their food too low, thinking that they can undercut competitors. Explain why this is a poor strategy for success. Explain your position using 3-5 substantial sentences.

Answer 1

Undercutting competitors by pricing food too low can harm a foodservice business by failing to cover costs, creating a perception of low quality, threatening financial resilience, and risking a damaging price war.

Step-by-step explanation:

Pricing food too low as a strategy to undercut competitors can be detrimental to a foodservice business. It often leads to insufficient coverage of costs, which include not just the ingredients, but also other overhead like rent, equipment, and labor. Moreover, it can create a perception of lower quality, deterring some customers. If the margins are too thin, it could also mean that the business is less resilient to economic downturns or unexpected expenses, threatening its sustainability. Finally, if prices are too low, there's a risk of igniting a price war with competitors, which can drive profits down for everyone in the market and potentially lead to business closures, affecting workers' livelihoods and the business ecosystem.

Answer 2

Pricing a product too low may cause the producer of the product to be unable to produce it further along, as in reality they must not only hit even with the cost of the raw materials used but also make enough profit to live off of. In this way, trying to undercut competitors may cause a foodservice operator to lose money and go out of business. There is also a high possibility that consumers will see the low prices and assume the product is low quality. This makes it difficult to build a consumer base of loyal customers.