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.
Race to the bottom: What does it mean?
In 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 / lowest priced at that time.
Some large businesses use their financial muscle to work successfully with small profit margins. They have deals available to them, which smaller businesses can’t access. This allows larger businesses to compete in your marketplace, profitably, with extremely low prices (or fees).
However, small business owners tend to just lower their prices, as a way to make more sales or attract more clients. They then find competitors do the same, as you’ll see in a moment, and the race to the bottom begins.
This small business scenario, along with a better alternative, is what today’s post is all about.
The race to the bottom prize?
The winner gets, wait for it… the privilege of building a business on a foundation of customers or clients, 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 customers in the world: Those who switch from provider to provider, looking for the lowest prices.
Why is such a high risk, low return strategy so popular with small business owners?
They see it as an easy way to attract more customers or make more sales. However, a look at the medium and longer-term picture shows how this can go horribly wrong.
Here’s what I’ve seen small business owners do over and over again.
Bob’s race to the bottom
Let’s take Bob the business owner as an example.
- Bob decides to lower his prices by 10%. He soon notices a slightly better sales conversion rate.
- So, he lowers prices by another 5%. And it improves sales even more.
- Some of Bob’s competitors decide to do the same.
- The race to the bottom is on!
- Bob now needs to lower his prices by another (whatever)%, because his competitors are charging the same kind of prices as him. Bob’s prices are now rock bottom or very close to rock bottom.
- Bob continues to make some sales, BUT with very little profit.
- THEN… if a well-funded competitor decides to sell at a loss for 6 months (to gain market share), Bob has to try and survive on fewer and fewer sales, relying on income from hardly profitable customers.
- Alternatively, if Bob’s overhead increases and he has to start increasing his prices, all those price sensitive customers he raced to win, will start looking for the new, cheapest provider.
It’s very easy to attract customers by reducing your prices. However, it’s unsustainable. So, if this is something you are considering, please think again my friend. Consider the medium and longer-term consequences of winning the race to the bottom.
Relax. Here’s a better approach. One that works extremely well. (You’re welcome).