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Relearn Econ 101 to get away from price-driven competitionBy Kay Plantes
Whether your company is a start-up or old-line, offers a service or is a manufacturing business, chances are good you'll find yourself competing on price alone someday. The progression goes something like this: Your company was first to offer a product, a quality level, a technology, a location, or a cheaper way of doing something. Sales and profits grew steadily, letting you invest in improvements that sustained success. Slowly, however, "me-too" offerings appeared as other businesses nicked away at your advantages. At first, you thought customers just didn't "get it." Then you realized that quality and service levels that were once differentiators became requirements. Growth increasingly depended upon expanding distribution or acquisitions, but even these strategies dried up. Standardization, automation, cost cutting, and discounting are now job #1. Most companies slide along the slippery slope into price-driven, commodity-like competition without realizing it. There is no sudden shift in the wind, no bolt from the blue, no scurrying of small woodland creatures fleeing the impending cataclysm. Welcome to capitalism, where the rigors of competition turn once-innovative offerings into commodities. You can escape a commodity market - if you relearn basic principles we were all taught in Economics 101. All purchase decisions are based on net value: the value of benefits received (tangible and intangible) less the price (direct and indirect) paid. Value reigns even in commodity-like markets where benefits are so comparable that price alone creates net value differences. Com-modity competition can emerge with as few as two offerings that meet customers' requirements. The rate of return a business earns depends on supply relative to demand. Increased supply reduces selling price. That is why business customers try to get all suppliers to compete on identical terms, using tools like requests for proposals, bidding, and auctions. With companies forced to offer essentially the same thing, buyers can extract the lowest possible price. Consumer selection also drives down branded products' price premiums as products become more similar. The lowest cost supplier is the only financial winner in a commodity market. The only sustaining exceptions to this rule are natural or government-granted monopolies or oligopolies, where high entry barriers significantly reduce the number of competitors. These basic economic principles have not changed for centuries - they merely extract their toll far faster these days. How do they apply to you? If you cannot become the lowest cost supplier, you must offer differentiated benefits that competitors cannot easily copy. And, you must sell your offering at a price premium below the value of its superior benefits. This is easy to write and hard to do. Providing differentiated benefits that are not easily copied requires an in-depth understanding of the broader market in which you compete. It means redefining what you're selling and/or whom you're selling to. It requires bringing new skills in house and truly innovating at a time when you're being pressured to "streamline." If you think that sounds like too much work, think again. Ignore these Economics 101 lessons at your peril. You'll keep doing everything right - improving quality, enhancing productivity, and speeding production - only to find that cost cutting has consumed your energy while revenue and prices have fallen. plantes@execpc.com madison.com ©2009 Capital Newspapers. All rights reserved. |
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