What happens when a race to the Bottom can affect your business's Bottom Line
I had a chance to see a good friend of mine close to closing his business down before it was able to exit in its initial year.
This wasn't due to inadequate marketing experience, reckless spending and other common reasons you could consider for companies which fail. It's true that his mistake is quite commonplace in all businesses.
Do you want to know the way he came to be there?
There was an environment of a race to the bottom. Or in other words the exchange of prices. Before even launching his product, he studied what the competitors in the market were selling for. Instead of seeking to differentiate and charge more (his product is regarded as superior in its superiority) the company decided that it was better than to cut prices for competitors in order to win over clients.
But his big mistake was that, despite offering lower prices, the costs were higher than competition due to the quality of the materials and work that he required. At first, he had a minimal margin, and eventually realized he was losing money because the speed of production was reduced often by as long than an hour.
The following year, he needed get his self out of the abyss which cost him half the clients he served along with years of potential profit.
This is a very extreme example of how an effort to be the lowest can affect a business however I'm not certain if it's a significant anomaly. Industries all over the world try to figure out the degree to which they are able to lower prices to stay competitive and the result is hurting everyone. Have you heard of MoviePass?
The reason for this is that it needs to end. We'd love to help to understand the details of why an all-out race is only going to hurt your business, even though all seems okay in the moment. In order to start things off, I want to flesh out what a race to the bottom actually appears to be.
- What is the Race to the Bottom?
- Negative 1: The reason it kills Innovation
- Negative 2: This Means Your Brand Is "Cheap"
- Negative 3 You're Setting Your Future at Risis
What exactly is Race to the Bottom?
If you're a fan of the traditional definitions you're looking for, check out this explanation of the concept of"race to the bottom" or "race to the bottom" in the Financial Times Lexicon:
A situation where companies and countries try to remain ahead of the curve by cutting wages and living standards for the workers. The manufacturing of goods gets moved to a location where the pay is lowest, and employees are granted only limited rights.
In a simple sense the scenario is that has seen prices reduced while preserving overall profits. The reality is, when you're in a situation like that someone is forced to take on the burden of the price.
Sometimes, instead of cutting corners, companies will choose to reduce the pay of workers or working conditions so that they can make the same amount of profits with cost savings.
If you're looking for a contemporary day example of this, take an examination of the extremely competitive eCommerce-based industry.
The year ended in December the price for the item on Amazon was around 11% lower than leading competitors. The price ranged from 1 percentage difference, or even 17 percent. It is clear that somebody's taking a loss in some place.
It looks like Amazon is doing well. The company has posted profit in 11 straight quarters and have even earned $1.9 billion in the holiday season of 2017.
However, in recent months certain serious abuses committed by employeeshave been revealed and demonstrate the extent to which Amazon appears to be using shortcuts. The workers have complained of constant monitoring as well as getting no bathroom breaks and even anxiety-inducing asthma attacks as a result of stress.
Even though Amazon has been adamant about its claims, it's not easy to see that the company is a viable method of conducting business after you start to connect the dots.
These trends have also been affecting prices that are set by the major retailers within their physical shops. Check out prices that differ from big retailers in the context of Thanksgiving, Black Friday, and Cyber Monday.
The market is a mess, even on most profitable days throughout the year, it's hard to determine the exact place in which customers can benefit from these big retailers.
However, the online and retail industries aren't the only places where these price fights occur. It's a problem that's plagued freelancers working on the web also.
In fact, the emergence of the smartphone app market has witnessed one of the most competitive markets and has existed for a little over 10 years.
At the start of the app store when it first opened, you purchased the best-quality app once, and then the application could be yours forever. Today, you are able to download nearly any app for free which is then sold regular updates or shown ads for income instead.
However, as with all price battles, there is one that you must be through, and in this particular instance, it's not the end user.
If this story doesn't scare you, I'm not certain of what else would. Within just 10 years, an exciting and modern sector was able from bottom to top , without any drama. If you're trying to generate the money you can from your app in the present, you need to either be creative or conform to the norm.
If that occurs, the outcome is a negative impact on your business's bottom line, as well as a negative impact for your company over the long run. Let's look at a few of them and demonstrate just how detrimental racing to the bottom is if you opt to be involved with one.
#1 is the Negative. #1 is what kills Innovation
The first and most important aspect is that running down the track can end up ruining your hopes and dreams of becoming the most ingenuous business in your industry.
If a business is looking to develop new ideas, there are a lot of things they must be aware of. Back in 2011, Harvard Business Review turned some heads when they published a listing of nine components they called "Critical success factors". This is the list they created:
- A good reason for innovation
- A common, high-minded vision of the future.
- An innovation strategy that everyone agrees on
- Participation from the senior management
- Decision-making based on teamwork that gives the most passionate leaders the confidence to lead.
- An innovative and inspirational team.
- Open-mindedness to market changes
- It's the will to take risks regardless of the risk, even if they seem crazy
- Flexible execution parameters
Do you notice something missing in them? The article doesn't talk about profitability, money or other financial issues. Some might find it offensive this statement, but the thing that is being said here is that the ability to earn money isn't the only factor that can lead to true innovation.
Yes, if you're capable of innovating your business, you'll probably reap some profits. Look at Apple. It was founded to make computers. But then, the technology revolution came along, and developed the industry of smartphones which we enjoy today. Their net value is over $900 billion.
The proof of the possibility for innovation in a positive context increases with each examine. This is a great illustration of the methods credit unions can use to create new ideas in the competitive world of banking.
Again, a very little of this process involves the possibility of earning money. In any case, it is all about "ideas or adjustments that can be implemented in the least amount of time, while generating the most returns on investment." That doesn't sound like slashing employee benefits to me.
What makes this image more appropriate is the present price battle in the banking industry which could thwart the best efforts of innovative people in credit unions. The competition to find the lowest prices is everywhere.
Study upon study has shown that environmental conditions play a major role in determining the path for innovations We've taken a long hard look at the conditions which are being created by the corporations that currently conduct price wars. They're suckers.
You can't create a price war and then create a requirement for the company's culture to invent, nor. The key is to build an conditions that make employees feel safe and secure enough to be able to innovate. With no room to fail (and possibly be liable to lose the money) and lose money, employees will not be motivated that they need to be able to make the necessary changes.
However, business is all about profits and we have to tackle the problem of earning money through innovation. Though culture appears to be an obvious winner but it's important to take review of methods to be creative at a rapid pace and still make ends meet.
The process was well described with great detail by Bridget McCrea in piece that was published in Ted Magazine. It was called "Cultivating Extreme Value." The person who wrote this article spoke with Tim Young, a strategist who works for a company called Interstate Electric Supply. Tim Young best articulated the point with his own phrases:
"Distributors should work to develop new ideas, creating value , and become the "go-to source' for customers that make important purchasing choices."
What he's saying here is that for companies to be innovative and stay free of price battles, they must concentrate on developing a product or service that is worth the cost. If the value you offer is high enough, profit and new ideas are sure to come in the future.
Take a look at the harm that Southwest Airlines has done to the airline industry if you are looking for a great example of this idea at work. Southwest Airlines "bags fly free" strategy may appear to be a conflict of words at beginning, however at the end of the day, it's really a simple deflection of their costs into various other sectors.
There are no meals, on-flight entertainment First-class seats, any other creature comforts that airlines offer. The planes take passengers from point A to B, which is what they offer. It's literally a floating metallic tube that comes with snacks, soda and peanuts bags.
It might be surprising at first even with all these amenities taken away, Southwest hasn't been the cheapest airlines in the past. However, the airline has managed to sustain for 45 consecutive years of financial success.
Innovating in the benefits they bring, Southwest actually avoids a huge price war and has created an impressive standing in the market. If they were to focus solely on selling a lower cost, it's difficult to determine if this strategy could produce the same outcomes.
Negative 2: This Means Your Brand's name is "Cheap"
One of the negative effects that price wars can have has to have to do with your general image as a brand. Your brand image created with your logo is among the main indicators of the performance within a company. This is how you can tell if that you've "made your impression."
So when you ask your customers to choose a word that they associate with your company, the last thing you want to be hearing"cheap. "cheap."
But, if a low price is all you need to get your customers to sign up with your business and cooperate with you It's probably the reason that they're interested in you. The reason they're interested is because you're affordable.
It's the reality of industry that there are always going to be those who want something for cheap. The business world is about making deals and trying to negotiate a better bargain, and everyone is able to set their own price range to consider. Also, you must consider your own bottom line.
Cost-effective and having a great time do not always go together, but they do go hand-in-hand. There is no need to be a guru to locate the most well-known Venn diagram that explains what makes quality, speedy and affordable.
It's simple to say that it's impossible to obtain everything you require in a race to the finish line. If you're trying to produce a poor product, you'll have to sacrifice something. And when you start compromising like that, it won't wait long for customers to see the decline in quality.
Numerous studies have attempted to demonstrate the validity of this assertion. One 2014 study which was published by the National Bureau of Economic Research was able to show that there is a link between price competition and top-quality services. That means that when the prices were lower at retail outlets, the overall service was lower than the previous level.
An additional study revealed that pricing has a negative effect on an individual's perception of value. If the price is small, it is cheap. If the price is expensive the product is likely to be a ripoff.
In keeping costs to a minimum affects the general perception of your business. in the negative. Therefore, a lower price should not be the most important difference between you and your competitors. It only creates permanent image issues.
Find a method to compete with your low-cost rivals that can assist you to progress over the long run. The idea isn't novel one either. Harvard Business Review has published a flowchart that is useful in 2006, arguing that one should engage in a pricing war. It's a resounding "no."
Focus on what sets you apart in the crowd. It may be hard to do, nobody ever claimed that winning was meant to be effortless.
As an example, you could continuously look for new ways to improve your marketing and create a fresh client base. If all else fails, Simon Sinek's famed Golden Circle remains true. Be sure to provide a convincing argument for your decision, and then success will come.
Another option is to concentrate on the search for a niche that can be developed later on to create some type of profit. There are numerous tips to guide you through choosing a topic that can aid your company in getting rid of the"cheap" image.
Take note that taking part in efforts to become the top will make you look low-cost and eventually be a loss to your clients. Concentrating on quality can not only help you become succeed, but will increase your customers' loyalty and will help you build a stronger place for the years to. come.
Negative 3: Puts your future in danger
It's a complete system. Like my friend with an enterprise that nearly went under due to a race for low costs It is important to be aware of what could happen to your business's future when costs are too low.
If you're not making money that's why it's hard to place cash into the future or be certain whether it'll happen. There's plenty of negativelong-term effects which have been reported by entrepreneurs through the years.
Price cuts that are temporary can turn into permanent ones all too quickly. Profit margins that are less than the ideal level mean there's fewer options for growth. If you attempt to raise your prices you're likely to find that you'll just stop customers from coming to your store.
Just look at the current problem facing Procter & Gamble. Due to price cuts as well as "skirmishes," they could need to trim budgets in the next few months. Even though the future doesn't seem certain, they're in jeopardy enough to be making news that isn't beneficial for any person.
A different way of looking at this subject is to look at it through the perspective of what's necessary to help a business become succeed over time. Craig Ormiston recently shared his opinion of the Elon Musk Company Formula and you'll see the sustainability aspect is an aspect that allows a company to achieve long-term objectives.
It should be normal sense, however it's important to have a sustainable plan in order to last more than a two months. There's no point in the amount of seed money you receive if it's likely to go to waste. One way to increase your business in any field is to create a sustainable company model that's lucrative across the entire spectrum.
A strategy of racing down the road to get there is not an effective long-term strategy. If you sell your product for less, the basic mathematics will inform you that within a short time you'll be selling at a loss If you don't stop running the business. There's been no mention of a business that saw long-term success by maintaining its sales in the black.
One of the best methods to avoid being in a downward spiral is to sit down and create a business strategy. If your plan is successful, you are able to come up with new strategies for buyers to be enticed to shell out more for the item or service or.
Be aware that the cheapest price may not be the most efficient price. Even if your main differentiator is something that isn't too complicated, like speedier shipping or better support for customers, it's the little aspects that can set you apart and win the attention of customers with praise from customers. These rave reviews are sure to result in more customers for the future.
The idea of matching prices will doing anything other than cause harm. It will hurt your company and eventually leaves you high and dry. It's difficult to earn a profit in a business that is in decline, so make sure to never get to the point of failure.
Summary
This isn't just a fairytale doomsday prophecy. It's a real debate. If you're not already a multibillion dollar company, it's business foolish to join a race to the lowest point. You just won't succeed.
There is no way that anyone is going to be able to take home the trophy. Customers will receive disappointing products. Your workplace environment for employees will be affected. You'll soon run out of cash.
- Price battles are not difficult to understand, however they're extremely dramatic. If you're hoping to become the next innovator, don't engage in a war of pricing. Innovation stems from stable environments and a willingness to fail. The reduction of your competitor's prices can cause you to lose your the balance, and stop innovation from beginning.
- If you're trying to establish yourself as the most popular brand on your market and avoid the "cheap" stigma You shouldn't get caught involved in a price battle. Cheap, speedy or good quality is an actual thing that your clients are going be able to see when the price doesn't match. The best marketing techniques in the world can't fix that.
- In the final case that you want for success in business, it is not necessary to get involved caught in a price battle. Lower prices mean less margins that could be lost fast. Focus on creating an effective business plan and applying a solid strategy rather than rushing into the future in order to reach your goal.
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