Without knowing it, many business owners are engaged in a dangerous race to the bottom. In today’s post, I explain why this is almost always a terrible strategy for business owners. I also share some proven advice on how to avoid it happening to you.
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. However, the coronavirus pandemic is seeing a massive surge in price-cutting and fee reductions. The ‘winner’ of the race to the bottom is the business that’s the cheapest / lowest priced at that time.
Some big businesses use their financial muscle to work successfully with low prices (or fees). Their buying power means that they have deals available to them, which smaller businesses simply can’t access. This allows larger businesses to compete in your marketplace, profitably, with extremely low prices.
However, small and medium-sized business owners tend to just lower their prices, as a way to make more sales or attract more clients. They then find their competitors do the same.
And the race to the bottom begins.
The winner gets, wait for it… the privilege of building a business on a dangerous foundation of customers, 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 why this usually goes 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 now on!
- Bob then needs to lower his prices by another (whatever)%, because his competitors are charging the same low 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, very little profit.
- At this point, it’s a case of waiting for one of the following common scenarios.
- Scenario one: A well-funded competitor decides to sell at a loss for 6 / 12 months (to gain market share), Bob then has to try and survive on fewer and fewer low-profit sales. This is HUGE right now, as financially strong small business owners seek to crush their competitors during the pandemic.
- Scenario two: Bob’s overhead increases unexpectedly and he is forced to start increasing his prices, all those price sensitive customers he raced to win will now look for the NEW, cheapest provider.
It’s 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.