When you see a competitor announcing colocation price reductions, what do you do? If your reflex is to turn to your calculator or spreadsheet to see if you can undercut with an even bigger discount, then take a moment to think. Even if the other provider’s colocation offering looks identical, a knee-jerk reaction to slash prices on your side could be a desperate move that does your business more harm than good:

• Your credibility. If your existing customers see you cutting prices, they may see this as meaning you were overcharging in the first place.
• Your cash flow. Existing customers will expect to benefit from your new, lower prices, but there is no guarantee you will attract additional new customers. You could simply end up with less revenue and less profit.
• Your marketing. Unless you have made a calculated decision to become the low-cost provider, price alone is a poor marketing tool. The big problem with prices is that they are numbers and instantly comparable. And some other provider can always charge a dollar less than you do.

There may be other reasons to be wary of panicky price changes. Colocation services may be just part of the competitor’s business, whereas it is your sole business focus, for instance. Price cuts may not hurt that other company unduly, but could severely damage yours.

Don’t Make Colocation Pricing a Cause for Doubt

While price changes can sometimes make sense, they should be at your initiative. Bear in mind also that while customers traditionally like a bargain, value for a reasonable outlay is often preferred to rock bottom prices, especially in business. In fact, below a certain level, customers may find it difficult to believe the product or service provided has any real value at all.

So much for not pricing your colocation services based on desperation, but how can you ensure existing customers continue to pay your current prices and even sign up new customers?

Differentiation is a Smarter Solution

The answer is differentiation. The more you can convince customers that your colocation services bring more value to their business, the less price becomes an issue and the more robust your business model will be. That, in turn, means doing more than just “dolling up” a “U” or a rack of space. Trying to compete on technical specifications is often little better than just trying to win through on price.

Your differentiation will need to correspond to things customers want over and above specs and prices. While your solution will need to be competitive, you won’t need to be the cheapest or offer the highest specifications, if you offer features such as:

• Predictable OpEx. For many business customers, locking in a reasonable budget beats potentially low, but variable colocation pricing.
• Geographical proximity. If you are the local provider, use this to your advantage.
• Smart “remote hands” facilities. If you are not a local provider or can save your customers the time and money needed to travel out to your site, then use this to differentiate your offering.
• Professional services. Skills in the IT world are often in short supply. Offer your customers hardware expertise, maintenance know-how, or another thing they need, but cannot easily get elsewhere.
• Compliance. Companies are increasingly accountable to their own stakeholders about the security and availability of their systems. Help them by offering appropriate levels of compliance and business continuity.

Successful differentiation that protects your colocation pricing and profits will not happen on its own. However, it is the opportunity for you to take charge of your own destiny as a colocation provider, and undoubtedly a better option than being a victim of price pressure (and perhaps somebody else’s desperation.)

Have you been in a price war for colocation services? Tell us about your experience, the outcome, and any tips you would give about handling it, with a line or two in the space for comments.

If you're in the data center, mission critical or cloud services industries, or you sell to the data center industry, don't miss our weekly update newsletter -- Data Center Sales & Marketing Institute (DCSMI) Update Newsletter. Get notified about new reports, events, podcasts, and blog posts.