Stop Competing on Price
It is not unusual to find companies that have made a lot of changes to the business only to find that those changes had little impact on its ability to increase market share, or worse yet, caused market share to decline.
It is also common to go into companies and find only a small percentage of their clients/consumers showing loyalty. The predominant discussions among their salespeople revolve around price. Many business owners mistakenly believe there is nothing that can be done to change client/consumer focus on price.
Declining market share, stable market share, and disloyal clients/consumers mean that a company does not have a suitable strategy or that its strategy is not being executed well. There are some companies whose strategy is to have the lowest prices in the marketplace (e.g. Walmart), and they have the scale, systems, and infrastructure to continually keep costs lower than their competition, allowing them to earn a sizeable profit because of the volume they generate. As long as a company has the capacity and/or can find enough vendors willing to put products on their shelves so that price/volume mix is worth the return on effort, it is a good business model. The challenge is that this is a tough place to play. Technology is constantly changing, and many businesses find that there is always someone willing to sell cheaper. So then what?
People often spend more time figuring out how to build their fantasy football teams, plan their vacations, and handle other unimportant matters than they spend on building their business strategy. While strategic planning is more difficult and is likely to result in some mistakes, not putting the proper time into strategy is inexcusable. Business strategy should be revisited at least quarterly in every business. Most companies do not make the time, and it costs them millions in future revenue and profits that they’ll never see.
A big part of building a strategy that helps avoid price competition is having the ability to segment the potential client/consumer base and target ownership of specific segments. The more segments you want to own, the higher your cost structure. The better you position and execute your segment ownership plan, the more you will grow. The key to segmentation is not looking at market segments by customer size, geography, industry group, or other traditional demographics. The key is to look them by the need or want that your company can best serve. Here are some examples:
- Are they the type of customer that only looks for lowest price, no matter what?
- Are you in the hospitality business, and are they looking to be pampered?
- Are you in the fitness business? Are your target customers the ones whose doctors have told them that they will die before they are 40 if they do not trim 40 pounds?
- Are you in the hearing aid business? Are your target customers those who have lost their hearing and are very sensitive about the issue and want to do business with people that understand their pain and can provide them with a proper experience to deal with this sensitive issue?
- Are you in the transportation, freight forwarding, and logistics industry, and your clients are always squeezing you for lowest price? Could you charge them a lot more and still save them a lot of money if you helped them solve the inefficiencies in their logistics functions?
When developing your strategy, you must understand the potential marketplace at least 3 years out and project how you think your industry is changing in terms of products, customers, technology, delivering products and services, sophistication of employees, and other pertinent matters. Once you have considered these factors, you need to segment the different types of clients you have and which segments you want to own. Then you need to build your strategy to own them. If you are primarily competing on pricing and do not own any segment today, you have a tremendous opportunity to improve your growth and profits. Just take the time to build a winning strategy.
Howard Shore is a business growth expert that works with companies that want to maximize their growth potential by improving strategy, enhancing their knowledge, and improving motivation. To contact Howard Shore please call (305) 722-7213 or email him at [email protected].