Without knowing it, many small business owners are engaged in a dangerous race to the bottom. In today’s post, I explain what’s meant by marketing professionals when we say race to the bottom, and why it’s almost always a terrible strategy for small businesses.
The Financial Times defines the race to the bottom as:
The situation in which companies and countries try to compete with each other by cutting wages and living standards for workers, and the production of goods is moved to the place where the wages are lowest and the workers have the fewest rights.
In small business marketing, we tend to use the term to refer to making sales or winning new clients, based on being the cheapest option. This is most common among commodity businesses. The ‘winner’ of the race to the bottom is the business that’s the cheapest at that time.
Some large companies use their financial muscle to work successfully with small profit margins. They have strategies in place, as the FT quote suggests, that allows them to compete on very low prices.
However, small business owners tend to just lower their fees (or prices), as a way to make more sales or attract more clients. They then find competitors do the same (see below) and the race to the bottom (the lowest price) begins. This small business scenario, is what today’s post is all about.
What does the winner get as their prize?
They get, wait for it, the privilege of building a client list of fee sensitive people, who will leave them the moment a cheaper provider comes along. It’s a high risk, low return strategy. It requires you to constantly look for ways to lower your overhead, cut corners and speed things up. All this, in an effort to attract the least loyal profile of clients in the world… those who switch from provider to provider, looking for the lowest fees or prices.
Why is such a high risk, low return strategy so popular with small business owners?
Simple: They see it as a fast way to attract more clients or make more sales. However, a look at the medium term picture shows how this can go horribly wrong.
Here’s what I have seen small businesses do over and over again:
- They lower their fees (or prices) by 10% and see that they get a slightly better sales conversion rate.
- So, they lower their fees by another 10% and see it improves sales even more.
- Some of their competitors decide to do the same. Now, the race to the bottom is on!
- That first business now needs to lower their fees by another 10%, because their competitors are charging the same kind of fees as them. Their fees are now rock bottom or very close to rock bottom.
- After a while, they are working with clients or making sales, with very little profit.
- If a better funded competitor then decides to undercut them, they have to try and survive on fewer and fewer clients, who are hardly profitable.
- Alternatively, if their overheads increase and they have to start increasing their fees, all those fee sensitive clients they raced to win, start looking for the new, cheapest provider.
In the absence of an effective marketing strategy, it’s just too easy to lower your fees in order to get some fast money into your business. If this is something you are considering, please think about the medium term and longer term consequences.
PS: Here’s the best way I know, for you to grow a great business in a competitive industry, WITHOUT EVER lowering your fees.