Except for the largest of businesses with massive capital and resources, competing purely on price is sure way to eventual failure. You walk on such razor thin margins, that even the slightest of variations could make your business unprofitable overnight.
Suppose you charge Rs. 5000 for your service, a competitor comes and offers the same to the client for Rs. 4000, then you lower it to Rs. 3000 to avoid competitors taking away your market share, then the competitor lowers it to Rs. 2000. Then you lower it to Rs. 1000. Finally you both go out of business. What a happy ending!
As you can clearly see this is not a strategy that works for most businesses. With the exception of businesses with massive resources, the way to sustainability for most businesses is not volume but margins.
Furthermore even huge businesses, that competed on volumes but with razor thin margins had big losses the moment something disruptive took place that hit their volumes.
For example, for a long time the Walmarts of the world ruled the retail market. But with the advent of ecommerce stores such as Amazon, that had lower expenses and could provide even lower prices, the profits of companies such as Walmart and other big retail stores were hit massively. Walmart is surviving because of its resources but many other similar high volume low margin retail companies have closed many of their stores. Macy’s, J.C. Penney, Sears, Kmart etc are many of such popular American retail companies that have been closing many stores. The smaller ones have gone out of business completely.
Remember: Low Volume and Low Price are a recipe for disaster and not everyone can get high volumes!
Even for high volume businesses, their low price makes their business model highly risky. 60 percent of Fortune 500 companies of the 1970’s are no longer in business because they only competed on price or failed to adapt!
There are only two ways to survive in business in the long term – Stay Highly Adaptable and Have Higher Margins.
When you have higher margins
- You are less likely to go out of business when the volume of your business is impacted due to any reason.
- You have more money to spend on advertising, increasing sales further
- You have more money to spend on hiring the best talent that grows your company further
The only way to get out of the Competing on Price Rat Race is to increase your prices and go for higher margins. Easier, said than done right? Absolutely! But while raising your price maybe initially uncomfortable, ultimately it is what will save your business.
If you have been competing purely on price, if you raise your prices, some of your customers are likely to go elsewhere. This fear is what leads to people sticking to the same price, unless the entire industry raises their prices.
So how do you solve this? There are two main keys to being able to effectively raise your price and start competing on margins. The key is
Change what you sell.
Change who you sell to.
Both these subjects require quite a bit of detailing and warrant another article for themselves! Stay tuned for my next article where I go into more detail on the two points above and give you a simple and effective method to increase your price and margins!