Competing with lower prices is stupid(onesock.net)
onesock.net
Competing with lower prices is stupid
http://www.onesock.net/2011/08/its-always-going-to-be-more-than-lower-prices/
8 comments
This guy is really missing the point. Fixed costs aren't just overhead - they're fixed. Even if you decided to stop selling, you'll likely still be paying them (e.g. a lease on a building). If times are tough, it still makes sense to sell below cost but above variable cost to reduce the sting of the fixed costs. If you want more details, read a micro 101 textbook.
A managerial-accounting-101 textbook would also suffice.
Sure, all businesses prefer to keep the customers who don't care about price; but you know what? there is rather a lot of competition for those customers, because all businesses prefer those customers. This means that instead of spending on infrastructure, you will spend on sales.
I mean, depending on how good you are at sales, you might still come out ahead, or you might not. All I'm saying is that the top end of every market I've seen is just as competitive as the bottom end, and you are constantly defending yourself from newcomers.
Now, in my experience, this manifests itself on the top end as being very difficult to break in to the market. PG has some quote about how you might be able to out-engineer Oracle, but you will never be able to out-sales Oracle. Of course, if you do break in to the top end, it's usually a plum place to be; even after paying exorbitant sales commissions, you are usually sitting on a large margin. But damn, it's hard to break in.
On the bottom end of the market? My experience has been that it's much easier to break in. I mean, yeah, margins are much lower, but marketing and sales become almost trivialities if you are dramatically cheaper than the other guys.
A traditional strategy, especially in the infrastructure world, is to break in to the market on the low end; build credibility and a customer base, and slowly float in to higher-end markets. This is especially easy with infrastructure because your costs are always falling. Simply double the capacity you provide per dollar less often than once every two and a half years, and you are raising your prices.
Really, I think it's a fairly good strategy.
I mean, depending on how good you are at sales, you might still come out ahead, or you might not. All I'm saying is that the top end of every market I've seen is just as competitive as the bottom end, and you are constantly defending yourself from newcomers.
Now, in my experience, this manifests itself on the top end as being very difficult to break in to the market. PG has some quote about how you might be able to out-engineer Oracle, but you will never be able to out-sales Oracle. Of course, if you do break in to the top end, it's usually a plum place to be; even after paying exorbitant sales commissions, you are usually sitting on a large margin. But damn, it's hard to break in.
On the bottom end of the market? My experience has been that it's much easier to break in. I mean, yeah, margins are much lower, but marketing and sales become almost trivialities if you are dramatically cheaper than the other guys.
A traditional strategy, especially in the infrastructure world, is to break in to the market on the low end; build credibility and a customer base, and slowly float in to higher-end markets. This is especially easy with infrastructure because your costs are always falling. Simply double the capacity you provide per dollar less often than once every two and a half years, and you are raising your prices.
Really, I think it's a fairly good strategy.
Blatant Generalizations Are Awesome
Use absolutist terms when blogging about something. Uncritical readers will cheer you for your clarity.
Everyone else will be able to find at least one thing wrong with your post.
Is this the optimal model to generate participatory comments / game voting based news sites?
Use absolutist terms when blogging about something. Uncritical readers will cheer you for your clarity.
Everyone else will be able to find at least one thing wrong with your post.
Is this the optimal model to generate participatory comments / game voting based news sites?
I find references to "resource" in general to be unnerving and a bit offensive when it refers to a member of the human race. When I hear about "buying another resource" meaning hiring an expert, it really starts to sound like some strange form of slavery, humans being bought and sold like pigs.
Well, that is the whole purpose of the Human Resource (HR) department, to treat humans as resources to be bought, sold, and manipulated.
FWIIW, I and several other engineers left a large company with all the standard large company HR BS for a small company. When the small company proposed implementing performance appraisals, I lead a court revolt based on the following article:
http://www.entrepreneur.com/humanresources/employeemanagemen...
My email to my boss:
"[T]hey are a way to document poor performance-in other words, a step in the firing process."
Bingo. Henceforth I will consider a (big company style) performance appraisal the equivalent of a "pink slip" - notice of the company's intent to fire me.
On the other hand, I will welcome an open and honest discussion of my performance at any time. I would expect a more substantial discussion periodically (at least yearly), preferably with the openness and honesty aided by judicious application of beer.
P.S. "Some of us" were BSing about this this afternoon and came up with a good analogy... You wouldn't do a "yearly performance appraisal" with your son, once a year beating the tar out of him for all the bad things he did and then giving him a gumdrop for the good things.
FWIIW, I and several other engineers left a large company with all the standard large company HR BS for a small company. When the small company proposed implementing performance appraisals, I lead a court revolt based on the following article:
http://www.entrepreneur.com/humanresources/employeemanagemen...
My email to my boss:
"[T]hey are a way to document poor performance-in other words, a step in the firing process."
Bingo. Henceforth I will consider a (big company style) performance appraisal the equivalent of a "pink slip" - notice of the company's intent to fire me.
On the other hand, I will welcome an open and honest discussion of my performance at any time. I would expect a more substantial discussion periodically (at least yearly), preferably with the openness and honesty aided by judicious application of beer.
P.S. "Some of us" were BSing about this this afternoon and came up with a good analogy... You wouldn't do a "yearly performance appraisal" with your son, once a year beating the tar out of him for all the bad things he did and then giving him a gumdrop for the good things.
I completely disagree, and so does Ryanair.
Competing on price is entirely possible and feasible. What it boils down to is understanding how that affects your positioning (i.e. being known to compete on price) and how that affects your value proposition (if your only value add is price, then you're commoditising your productivity).
To put it another way, Ryanair compete on price and routinely gouge their customers, but they still have them. EasyJet competed initially on price without (initially) gouging customers and took large sections of the UK domestic and short-haul business market. British Airways are now struggling to keep afloat as their cost structure is no longer competitive.
If you're going to compete on price you need to have some very rational and thought out plans as to how you intend to compete on price and for how long. When we started doing penetration tests in Local Authorities at Mandalorian (where Local Authorities have been told to cut around %20 in costs overall) we deliberately sold at a lower rate in order to capture specific key councils in specific regions, so we could use them as case studies to go after the rest in that region. It didn't fundamentally affect us (other than not being sexy work) as what we lost in profit we made up for in volume. Now we have sufficient presence in that market to bring our prices back up to what the market will bear, and we have a good pricing strategy to boot with a low cost base.
At 44Con we originally didn't have a hotel to host the event (or speakers for that matter), but needed to raise funds for the deposit. We started selling early bird tickets at a discounted rate in order to raise funds instead of taking a loan from the bank, and it was much more successful. That, combined with sponsor funding has meant that we'll be in a better position next year to enter venue negotiations for the next 44Con.
The bottom line is that as a startup you won't have a brand and competing on price is a potential route to revenue while you have a low cost base. If you're close to ramen profitable but need revenue quickly, lowering your prices can work as a strategy providing your volume increases and you know what your costs are (and aren't making a loss in the process, at least unless you have cash to burn). Competing on pricing in an established market is absolutely the right thing to do and the easiest way to disrupt while your MVP is still being built or has only just shipped.
Competing on price is entirely possible and feasible. What it boils down to is understanding how that affects your positioning (i.e. being known to compete on price) and how that affects your value proposition (if your only value add is price, then you're commoditising your productivity).
To put it another way, Ryanair compete on price and routinely gouge their customers, but they still have them. EasyJet competed initially on price without (initially) gouging customers and took large sections of the UK domestic and short-haul business market. British Airways are now struggling to keep afloat as their cost structure is no longer competitive.
If you're going to compete on price you need to have some very rational and thought out plans as to how you intend to compete on price and for how long. When we started doing penetration tests in Local Authorities at Mandalorian (where Local Authorities have been told to cut around %20 in costs overall) we deliberately sold at a lower rate in order to capture specific key councils in specific regions, so we could use them as case studies to go after the rest in that region. It didn't fundamentally affect us (other than not being sexy work) as what we lost in profit we made up for in volume. Now we have sufficient presence in that market to bring our prices back up to what the market will bear, and we have a good pricing strategy to boot with a low cost base.
At 44Con we originally didn't have a hotel to host the event (or speakers for that matter), but needed to raise funds for the deposit. We started selling early bird tickets at a discounted rate in order to raise funds instead of taking a loan from the bank, and it was much more successful. That, combined with sponsor funding has meant that we'll be in a better position next year to enter venue negotiations for the next 44Con.
The bottom line is that as a startup you won't have a brand and competing on price is a potential route to revenue while you have a low cost base. If you're close to ramen profitable but need revenue quickly, lowering your prices can work as a strategy providing your volume increases and you know what your costs are (and aren't making a loss in the process, at least unless you have cash to burn). Competing on pricing in an established market is absolutely the right thing to do and the easiest way to disrupt while your MVP is still being built or has only just shipped.
I think the author misses the point that lower prices can actually be an incredible strategic advantage as long as you have the business model that supports it. You only need to look at a business model like ikea or wal-mart to see this in action. It also creates a Nice barrier to entry as the scale and experience you need in order to achieve thst low cost base is often impossible for new entrants unless some sort of disruption happens.
One way to prevent some sort of disruption in a business is to make it so cheap that it's no longer worth the time and effort to threaten your business...
One way to prevent some sort of disruption in a business is to make it so cheap that it's no longer worth the time and effort to threaten your business...
I think the title is a little misleading. He says: "Cutting costs and only competing on price is a death spiral.". He is talking about competing only on price. Ikea is not only competing on price but also on quality.
Making your product/service very cheap is a death spiral when it misses quality. Take a look at the very cheap Chinese Android tablets. They are so cheap it's unbelievable. But after half an hour they run out of power. You have to push the screen in half to make it responsive. That is a death spiral and not a threat to other businesses.
Making your product/service very cheap is a death spiral when it misses quality. Take a look at the very cheap Chinese Android tablets. They are so cheap it's unbelievable. But after half an hour they run out of power. You have to push the screen in half to make it responsive. That is a death spiral and not a threat to other businesses.
He sounds like an amateur rent-seeker.
Fixed that for you. If you can have lower prices with the same or higher margins that's called an epic win.