How a Race to the Bottom Hurts Your Business's Bottom Line
I once saw a friend of mine close to destroying his business prior to it getting out of its first year.
It wasn't because of inexperienced marketing, reckless spending and other common reasons you might think of in the case of businesses failing. Actually, I believe he made a mistake that's very common in every business.
Are you curious about how he got there?
The created a race to the bottom. Or in other words, he initiated an exchange of prices. Before even launching his product, he studied what the competitors in his market were charging. Instead of seeking to differentiate and charge more (his product is regarded as superior in its quality) the decision was made that it was better to undercut their prices to try and win customers.
But his big mistake was that, despite offering lower prices, the costs were also higher than the competition due to the quality of the materials and work he needed. He started out with a minimal margin, and eventually discovered he was losing cash when the production was slowed at times by as much as one hour.
In the following year, he needed get himself out of an abyss that cost him half his clients as well as years of potential profit.
This is an extremely extreme example of how an effort to be the lowest can affect a business however, I'm not sure this is a huge anomaly. Industries all over the world try to figure out the extent to which they can lower their prices to compete with market, and the result is hurting all. Have you heard of MoviePass?
The reason for this is that it needs to end. I'd like to help you understand the ins and outs of how a race to the bottom is only going to hurt your company, even though all seems fine in the short term. And to get things started, I want to flesh out what a race to the bottom actually looks like.
- What exactly is the Race to the Bottom?
- Negative 1 The reason it kills Innovation
- Negative 2: It Means Your Brand is "Cheap"
- Negative 3 You're Putting Your Future at Risis
What exactly is the Race to the Bottom?
If by-the-book definitions are what you prefer, you'll appreciate this explanation of the concept of a "race to the bottom" in the Financial Times Lexicon:
A situation where companies and nations try to stay ahead by reducing wages and living standards for workers. The manufacturing of goods gets relocated to which the wage is the least, and the workers have only the smallest rights.
So on a basic basis, this is a scenario in which prices have been reduced while preserving overall profits. However, the truth is that when you're in a situation like that, somebody is being forced to cover the cost.
Many times, instead of sacrificing quality, corporations will opt to lower the wages of employees or work conditions in order to make similar amounts of profit with lower costs.
If you are looking for a contemporary day example of this take a look at the highly competitive online-based retail industry.
In the year that ended in December the price for an item from Amazon was around 11% lower than leading competitors. Prices ranged from a 1 percentage difference, to as much as 17%. This implies that someone is making a loss somewhere.
On the surface, it looks like Amazon is winning. They've posted profits in eleven straight quarters and even took home $1.9 billion over the 2017 holiday season.
But in the past few months, some grave abuses by workershave been exposed and show how Amazon seems to be taking shortcuts. The workers have complained of constant monitoring as well as being denied bathroom breaks, and even anxiety-inducing asthma attacks because of the stress.
Even though Amazon has been adamant about these claims, it's hard to envision the company as a viable way to conduct business once you start to connect the dots.
And these trends have even been affecting prices that are set by the major retailers within their physical shops. Take a look at price differences from large retail stores within the microcosm of Thanksgiving, Black Friday, and Cyber Monday.
The industry is completely scattered, and even on the top-performing days during the entire year, it's hard to get the exact location where customers get value of these major retailers.
However, the retail and e-commerce industries aren't the only place that these price battles take place. It's a problem that's plagued freelancers on the internet as well.
Even the emerging smartphone app market has experienced a race to the bottom, which has only existed for about a decade.
In the beginning of the app store, you paid for the highest-quality application once and the app was yours to keep forever. Today, you are able to download just about every app you want for free which is then sold regular updates or shown ads for income instead.
However, as with all price wars someone has to endure, and in this case, it's the end user.
If this example does not scare you, I'm not certain what else will. In just ten years, a brand modern and exciting industry was able to go from bottom to top without a lot of drama possible. If you're looking to earn profits from an application these days, you must either conform or be innovative.
When that happens the result is a negative impact on your bottom line and has adverse effects on your business in the long-term. We'll review some of these and demonstrate just how detrimental a race to the bottom could be if you choose to be involved with one.
The Negative: #1 Kills Innovation
The first and most important thing is that racing to the bottom can ruin your hopes and dreams of being the most innovative business in your industry.
If a business decides to innovate There are plenty of factors they need to be aware of. Back in 2011, Harvard Business Review turned some heads when they published a list of nine elements that they described as "Critical Success Factors". This is the list they came up with:
- A good reason for innovation
- A collective, lofty vision for the future
- A strategy for innovation that everyone agrees on
- Involvement from senior management
- Decision-making based on teamwork that empowers the most passionate leaders.
- An inspiring and innovative team.
- Open-mindedness to market changes
- It is the willingness to accept risks regardless of the risk, even if they seem absurd
- Flexible execution parameters
Do you notice something missing from them? The article doesn't mention money, profitability, or any financial issue. Many might be offended by this statement, but what appears to be being said here is that earning money is usually not an element for true innovation.
Sure, if you are able to innovate, you will probably make some profits. Take a look at Apple. It was founded to make computers. But then, the technology revolution happened, and they created the smartphone industry as we have it today. Their net value is over $900 billion.
The evidence of the potential for innovation in a positive environment increases the more you examine. This is an excellent example was shared regarding the ways credit unions are able to innovate in the competitive world of banking.
Again, a very small portion of this procedure has to do with earning money. In any case, it is focused on "ideas or changes that can be made in the shortest period, while generating the most ROI." That doesn't sound like slashing the benefits of employees to me.
What makes this image more timely is the current pricing war in the banking industry that could undermine even the efforts of innovators in credit unions. Once again, the competition to get to the bottom is everywhere.
Study upon study has shown that environmental conditions are the primary factor to innovation, and we've already taken a long hard look at the environments created by corporations currently conducting price wars. They're suckers.
You can't create a price war and then make it mandatory for your organization's culture to innovate, neither. You have to create the environment that makes employees feel engaged and safe enough to desire to innovate. Without leeway to make mistakes (and possibly lose money) and lose money, employees not have the motivation they require to make real adjustments.
But business is about profit and we have to tackle the challenge of making money by innovating. Though culture appears to be an obvious winner but it's worth having a an examination of the ways you can be innovative at a rapid pace while also trying to make ends meet.
The process was well described in detail by Bridget McCrea in piece published by Ted Magazine. She called it "Cultivating Extreme Value." The author of the article she talked to Tim Young, a strategist who works for a company called Interstate Electric Supply. Tim Young best articulated the point with his own words:
"Distributors must work towards developing new ideas, creating value and becoming the 'go-to source' for customers who are making the important buying decisions."
What he's saying here is that if companies want to be innovative and stay clear of a price war, they must concentrate on developing a product or service that's worth the price. If your value is good enough, then profit and new ideas are sure to follow.
Just look at the damage that Southwest Airlines has done to the industry of airlines if you are looking for a great illustration of this concept in action. The airline's "bags fly free" strategy may appear like something that's a war of words in the first place however in the end it's a simple deflection of their costs into various other sectors.
There are no meals, on-flight entertainment First-class seats, any other creature comforts of airline flying. They take you from point A to B which is the item they sell. It's literally a flying metallic tube with free peanuts, soda, and bags.
It might be surprising to you the fact that even with all these amenities taken away, Southwest hasn't been the cheapest airline in the past. In spite of this the airline has managed to maintain for 45 consecutive years of financial success.
Innovating in the benefits they provide, Southwest actually avoids a huge price war and has created an impressive position in the industry. If they were to focus only on offering a cheaper price, it's hard to know if this method would yield the same results.
Negative #2: This Means Your Brand's name is "Cheap"
One of the other negative consequences of price wars can have has to do with your general brand image. Your brand image created with your branding is one of the primary indicators of the profitability within a company. It's the way you know you've "made your mark."
So when you ask your customers to name a word that they associate with your brand The last thing you want to be hearing"cheap. "cheap."
However, if an affordable price is all you need to get your customers to join your company and work with you, it's likely that's the main reason why they're interested in you. They're around because you're cheap.
It's a fact of business that there will always be people who want something for cheap. Part of doing business is creating deals and trying to get an even better deal, and everybody has their own budget to think about. You also need to consider your own bottom line.
Being cheap and having a good time aren't usually going hand in hand though. You don't have to be a guru to locate the well-known Venn diagram, which discusses what makes quality, speedy and inexpensive.
It's simple to say that you cannot get everything you need in a race to the finish line. If you're going to try to make a low-quality product it will be necessary to compromise somewhere. And when you start compromising like that, it won't wait long for customers to see the decline in quality.
And plenty of studies have sought to prove the validity of this assertion. One study in 2014 that was released by the National Bureau of Economic Research appeared to demonstrate an association between price competition and high-quality service. This means that the moment prices were low at retail outlets, the overall service of the establishment decreased from prior levels.
A different study found that pricing has a negative impact on a buyer's impression of worth. If the cost is too low, the product is cheap. If the price is expensive, it is a a ripoff.
By keeping your costs as low as possible only affects the general image of your business be affected. So a low price shouldn't be the primary differentiator between you and your competitors. It only creates lasting image problems.
Instead, find a way to take on your cheap competitors that will help you move forward in the long term. This concept isn't a new one, either. Harvard Business Review released a useful flowchart in 2006 arguing whether one should engage in a price battle. The overwhelming answer is "no."
Concentrate on distinguishing you from the competition. Although it may be difficult, but no one ever said that competition was meant to be effortless.
For example, you can constantly look for strategies to refresh your advertising and approach a new customer base. If that fails, Simon Sinek's famous Golden Circle remains true. Make sure you have a compelling justification, and success will follow.
The other option is to concentrate on finding a niche and then create any kind of margin. There are plenty of guidelines to guide you through choosing a topic that can assist your business in getting rid of the"cheap" stigma.
Be aware that participating in an effort to be the best is likely to make you look low-cost and ultimately be a loss to your customers. Concentrating on quality will not only make you successful, but it will increase your customers' loyalty and help you gain a stronger place in the future. come.
Negative #3: It Places your future at risk
This makes it complete. Much like my friend with a business that almost went under due to a race to low prices, you need to be aware of what can happen to your business's future if costs fall too low.
If you're not making cash, it's impossible to put money into the future or even be sure of that it will happen. There's a lot of negative, long-term consequences that have been documented by entrepreneurs through the years.
Temporary price cuts can become permanent ones all too quickly. Profit margins that are less than optimal mean there are fewer options for growth. If you attempt to raise your prices you're likely to find that you'll just turn off customers.
Just look at the current dilemma faced by Procter & Gamble. Because of price reductions and "skirmishes," they could have to cut budgets in the next few months. Although the future isn't certain, they're in jeopardy enough to be making news, which is never good for anyone.
Another way to look at this issue is by using the lens of what is required to make a company successful in the long run. Craig Ormiston recently shared his opinion of the Elon Musk Company Formula And you'll find that being sustainable is one aspect that allows a company to achieve long-term objectives.
It should be common sense, but it's important to have a sustainable plan in order to stick longer than couple of months. It doesn't matter how much seed money you get if it's going to go to waste. One way to increase your business in any field is to create a sustainable business model that is profitable across all areas.
The idea of racing to the bottom does not work as a long-term solution. If your product is sold at a lower price, the basic mathematics will tell you that soon you'll be selling at a loss If you continue to run it. There's been no mention of a business that saw long-term success by maintaining their sales within the black.
One of the most effective ways to stay out of a race to the bottom is to sit down and come up with a business plan. If your strategy is successful, you are able to come up with new strategies for buyers to be enticed to shell out more for an item or product or.
Be aware that the cheapest price isn't always the most effective cost. Even if your main differentiator is something simple like faster shipping or better customer support, it's the little things that will set you apart and win you rave reviews. And those rave reviews will bring more business for the future.
Matching prices is essentially not do anything but harm. It undercuts your business and will eventually leave you high and dry. It's tough to generate income in a business that is failing therefore, be sure to never get to that point.
Summary
It's not just a fantasy doomsday prophecy. This is real discussion. In the event that you're not already a multibillion dollar company, it's business foolish to enter a race to the bottom. You just won't win.
There is no way that anyone is going to take home the prize. Your clients will be offered an unsatisfactory product. Your workplace environment for employees will suffer. Then you'll run out of money.
- The facts of price wars are easy however they are dramatic. If you want to be the next innovator, you shouldn't compete in a pricing war. Innovation stems from stable environments and a willingness to make mistakes. Cutting your competitors' prices will cause you to lose your the balance, and hinder innovation before it begins.
- If you want to be the best brand in your market and avoid the "cheap" stigma You shouldn't get caught involved in a price battle. Cheap, speedy or good thing is a real one that your clients are going to notice when your price doesn't match. The best marketing techniques in the world can't fix that.
- Then, lastly in the event that you are looking to have to succeed in the business world there is no need to get involved caught in a price battle. Lower prices mean less margins, which could disappear quickly. Concentrate on developing an efficient business model and implementing sound strategy instead of rushing down the road to get there.
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