What kind of car is sitting in your driveway?

No doubt you spent a good deal of time shopping around before you decided to buy that make and model. If you are like most people, you read the paper, visited a dealership or two and went to the Internet to check out reviews on various models you were considering. With hundreds of car models available to U.S. consumers today, the car in your driveway says something important about you - and about why people buy.

Despite significant hype to the contrary, most entrepreneurs aren't fortunate enough to come up with a business idea that is truly revolutionary. Most businesses out there - large and small - sell products and services that are available from other companies. To be successful, entrepreneurs must have a keen understanding of why people buy so they can create their business in a way that answers the question better than anyone else.

Where consumers have a choice in vendors, they buy almost any product or service for one main reason - and that reason is not price. People buy value.

I define value as the best combination of quality, service and price. There are any number of sub-categories as well. For example: speed as a component of overall service and payment terms as a component of price.

When business people don't understand why people buy, they frequently fall into the trap of competing on the basis of price alone. Unfortunately, price-driven companies are usually the most vulnerable, because it is just a matter of time until another desperate competitor comes along and offers an even lower price. For a company with a 5 percent net profit margin, even a slight drop in selling price (assuming other costs don't change) will wipe out their profits.

Think about it. If price were the only (or even the most important) buying factor, we would all be driving Yugos (a brand now dead for more than a decade) because it was the least expensive car sold in America at the time. While Yugo cars were sold at an excellent price, their quality was low and they represented a poor overall value. Eventually, because of the bad value proposition, Yugos couldn't be sold regardless of price - and the brand failed.

People rarely buy on price alone whether it's cars, clothing or even a gallon of milk.

I once owned a business that targeted a high-end consumer - perhaps the top 20 percent of the demographic in our area. We entered a market niche that was more than 100 years old, including a dominant vendor that was one of the largest advertisers in the entire market. Some people in the industry thought we were crazy to attempt to compete with this giant.

But we believed that our target consumers were looking for a better value, so we differentiated our offering from our competitor in several ways. We brought in the best products. We offered a huge variety of customized options. We spent extra time and money to have a more attractive display. We offered food to our customers when they entered the store. We invested heavily in the training of our salespeople. We completely assembled the products in our customers' homes and removed their old products at no charge. Finally, we set our selling price about 15 percent to 20 percent higher than our competition, and we rarely offered items on sale.

How did consumers react to our value equation? We were profitable the first month and developed an eight-figure business within a few years.

When building your business, it is essential to know why people buy. When you are tempted to cut your prices to stimulate sales, just look in your driveway and remember why a Yugo is not sitting there.>