The biggest challenge for businesses of all types these days is greater competition for dwindling market share. Unless you have a completely exclusive product or service that has an uncontested monopoly, you probably find yourself having to take less for what you sell.
As a friend said during lunch the other day, “people just aren’t opening their wallets.”
Groupon Madness and the Scarcity Mentality
The “Great Recession” hasn’t just changed the amount of buying going on, there is a total shift in the collective consciousness of the consumer. I can see it at the grocery store checkout: the looks on mothers’ faces as they tally their list and sift through stacks of coupon clippings.
My wife tells me of Groupons creating such demand that it downs the corporate web servers of GAP inc. I read recently that many small retailers issuing a first time Groupon suddenly find themselves unable to honor them because of unbelievable and completely unexpected demand. Businesses who unwittingly fall into the loss leader strategy trap using things like Groupons can find themselves playing a nonstop zero margin game for months.
Groupons get new customers, but they are only sensible if you have either a rock solid strategy for customer retention or a solid cushion in your margins!
The US consumer has entered a “hoard and protect” mentality, no doubt hard wired into our brains as a survival mechanism. People have desperate, hungry eyes, lurking like vultures from their home internet connections, looking for a way to pinch a penny — comparing prices, reading reviews, scouring coupon aggregation sites for a deal.
This puts small business owners in a difficult situation of tremendous comparative scrutiny. You probably find yourself having to answer to comparative pricing much more than you did a few years ago. For those businesses that operate in market segments with high competition, this can be absolutely miserable.
Fortunately, there is a way out. But it requires some soul searching.
When you find yourself trying to justify what you do or sell in an apples to apples game, you might be in trouble. You might be able to keep this up for a while if you are willing to operate at lower profits or if you’ve got lower costs that make it possible, but ultimately you are starting down a path of diminishing returns. In marketing this is called “operating from a low price position.” It’s a common strategy: you sell something cheaper than the others and the penny pinchers come flocking, right?
Uh-oh.. the gal up the street just lowered her price, now you are in a price war!
Not only is this a foolish game for you as a businessperson to play, but it lays the foundation for a more systemic problem: deflation. Yes, that’s right: deflation is considered one of the causes of the Great Depression’s “double dip” that was only relieved by wartime full employment.
When you see your competitors playing this game, it’s easy to follow suit.
Don’t: you should let them eat each other and do what the mavericks do: get out of that idiot wind! Your mother used to tell you not to jump off a bridge, right? This doesn’t mean throwing in the towel and boarding up the shop, it simply means you need to protect and reposition your business away from the battle for the bottom. Play it smart.
What your business needs is a creative differentiation strategy.
Here’s a nice elementary school example:
Selling Lemonade & Banjo Picking
You have yourself a little lemonade stand by the creek. Bobby and Betsy, your competitors up the creek are making lemonade too and dang it, they keep lowering their prices against yours! You both use the same ingredients; the same paper cups, and the same general recipe for quality lemonade. Thanks to their cutthroat prices, they are getting all the customers, but you notice that they work all day, never sleep and their life pretty much, well… sucks lemons: a pretty sour routine. If you worked that hard you would never have time to play your banjo, which is really what makes you happy.
You refuse to lower your price to match theirs because you don’t want to make it worse. Just as you are about to tear down your lemonade stand into campfire kindling and go back to playing your banjo for tips, an old man comes to you and offers you some advice.
“Well sonny, since yer about to quit anyway, why don’t ye’ play a little game just for fun to mess wit’ ol’ Bobby and Betsy’s heads,” he says.
Feeling like you’ve got nothing to lose you say, “OK… What?”
“Put yer lemonade in a bottle with a fancy blue label, add less sugar and call it somthin’ european soundin’ like Lemona Sveska Lite. Double yer price, shoot — TRIPLE IT! Keep sellin’ the same old stuff in a cup too with a different name, but at a touch higher price than Betsy and Bobby, and call it Lemona Classic. Also advertise that you only use organic locally grown lemons.”
(Note: you already use organically grown lemons – I forgot to mention this is really way out in the Tennessee hills and everything is organic).
You think the old man is little crazy but he’s a really good banjo picker with a fancy gold watch and real nice authentic alligator boots, so you proceed to follow his directions.
Well, since I’m telling this tale for a reason, you can probably guess that pretty soon, people start noticing your products. A few of the high falutin’ folk come over to your stand so they can avoid the long lines up the trail and all the dull people with stinky unruly kids. Because they’re the high falutin’ variety, they buy the premium drink that’s three times the price. And they are sure to walk around with the pretty bottles down at the swimming hole so people can see them enjoying the pricier PREE-MEE-UMM bottled beverage.
“It just tastes better,” they say. “It’s worth every red cent!”
Before long, others start to wander over. They see the high price of the premium drink and rationalize that the regular lemonade you sell MUST also be a much higher quality too since it’s made by Lemona from fresh locally grown organic trees. They don’t know what that means, but it must be good, cause it’s fancy soundin’. They say it tastes better too!
Within a few months, there are still the miserly money grubbers buying from Bobby & Betsy, but thanks to your premium price position, you are making more money than ever and working shorter hours.
Because you’ve got more time to enjoy life, your banjo picking is getting better too! The old man with the gold watch and the gator boots stops by and shares a lick or two from time to time, and he’s impressed!
“not bad, sonny!”
Admittedly, the above is a rather oversimplified and rudimentary example of a differentiation strategy based on brand and price positioning, but it attempts to illustrate a point without getting pointy headed: when you got into a price war, you can change the game so you are no longer competing directly with the other players who become victims of their own drive to the bottom. You created a new “open” market segment for something different. Something Mavericky.
Now, this seems pretty obvious to many of us, and as master consumers it probably sounds quite familiar — we can think of some brands that are probably way overpriced. Like who the heck actually buys the $7000 Prada bag in the window? But devising the right strategy can be very tricky. There are established systematic methods of market research that determine what may or may not work in any particular market segment. You might want to talk to a marketing professional about the right strategy for your business (wink).
The idea of “the Maverick” is a popular part of North American culture — the independent thinker who defies the herd and blazes a new trail. Right now, it might seem tough or scary to break from a herd that is fixated on delusions of scarcity. But frankly folks, If there was ever a time to be a maverick, it’s right now!
(cue western music)