Race to the bottom!
I’ve heard several reports recently which talk about companies doing everything they can to drive profit. And of course, the quickest variables to fiddle with are cutting quality and cutting employees.
Cut expenses, then you can reduce prices, so you’ll gain market share and win more profit. Here’s the problem with that logic. In a competitive market with multiple companies doing the same strategy, you don’t gain market share (or profit) at all when you reduce prices. Not unless you can do that faster than the competition for some reason – but that destroys your profit.
Unless you have a magic wand, of course. Most people out here in the real world don’t have one. You just have a bunch of companies all racing to the bottom, where NOBODY is eking out any kind of profit.
Fortunately, that’s not the only way to play the game.
The other way is to focus on adding value so you can charge what your products are actually worth. Yes, it’s hard work because you have to be smart and keep up with your customers.
But it’s really not harder than laying off employees and still not getting rewarded for it.
Let’s do a little thought exercise here. Let’s say that I have a product which is currently selling for $10, and it costs me $9 (fully loaded cost) to make. So, that creates a profit of $1 per product. Great!
But that attracts some low-cost competitors who can create the product for $8. They’re immediately rewarded by lowering the price to $9. Customers notice, and they start expecting (or demanding) a $9 price point from me.
That destroyed my profit. Completely.
So I’m in a world of hurt, because now I have to outsource to another country, lay off workers, find different partners, create new routes to market, and so on. Each of those is painful and risky. There’s a darned good chance that when I get through those changes that the competition will have lowered prices by another dollar. Or more.
We’re in a race to the bottom. That’s where one or two companies are eking out a few cents profit from every sale, and everyone else is losing money. This is what kills companies.
Do you want to be in a race where the reward is falling off a cliff? Is that what you’re working so hard for?
Of course, the other direction is to race for the top – to be the preferred vendor by the people who most value enduring quality.
I’ll talk about that more next week.
I’ve developed a tool which helps leaders to assess how they’re doing on these foundational elements. I’ll send you a customized report when you fill it out, giving you some feedback and ideas for where your attention might give the most powerful results. Check it out!