Well, obviously
I think so. Especially in the infrastructure industry, starting with very low prices and slowly working your way up the food chain is essentially how it's done. It's easy in the computer-infrastructure market, too; you simply don't lower your prices as fast as moore's law lowers your hardware costs.
I mean, you also need to think about your market and what they care about. It is a given, I think, that if you are breaking into an established market, you will be forced to accept lower margin than the established competition. But some markets? lowering the price won't help you. In those markets, don't lower your price, but spend a larger percentage of your revenues on sales or advertising. In some markets, like say contracting to 'enterprise' customers, it makes sense to actually charge more and give most of that to a middleman; I've never been able to get as much money directly renting myself out as I could going through a middleman, even after you take out the middleman's cut. Large corporations are more concerned about following the procedures than saving 50%. On the other hand, small companies? they'll switch providers for a 10% discount sometimes. Individuals paying with post-tax money can be even tighter than small companies. So know your market, and know if spending more on sales/marketing makes more sense or if firing the salesman and knocking his commission off the price will sell you more.
Another thing; Even if you provide the same service as the existing player, if your prices are significantly lower, you will probably be targeting a different market. I mean, I steal some customers from slicehost, but I think most of those are older customers who joined up when slicehost was small and cheaper. These days, really, I doubt there is a lot of overlap between the sort of people who would consider slicehost and the sort of people who would consider me.
Really, I think the slicehost example is a good one; back in the day, Slicehost was seen as the only player (marketing failure, I think, on Linode's part, mostly, if I'm remembering the timeline right. Linode was UML a long time ago, which is really a different product, but I think Linode was Xen by the time Slicehost hit the market. At the time, I was also selling Xen VPSs, but I was in no way a serious player.) So, there were a lot of people on Slicehost who switched to Linode or to me as time went on, as they were individuals or small companies.
But large companies? they want the big name, and barring a buyout, Linode and I can't give them that. (Linode is earning a reputation on their own, which is great for them, and really, for me too, because they have no reason to lower their prices as fast as they would otherwise. But they are a long ways from having the name that rackspace has.)
I was doing some consulting the other day for a friend who works for a very large company. They are paying rather a lot for dog-slow OpenVZ VPSs provided by Verio. They could have gotten a better deal almost anywhere, but they had the relationship with Verio.