You Are Competing on Price

by Joy Johnson on May 25, 2012

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Seth Godin wrote a thought-provoking post today called “The Tyranny of Low Price.”  He starts by saying,”If you build your business around being the lowest-cost provider, that’s all you’ve got. Everything you do has to be a race in that direction, because if you veer toward anything else (service, workforce, impact, design, etc.) then a competitor with a more single-minded focus will sell your commodity cheaper than you.”

Price is only one component of valueIt is a foregone and unarguable conclusion that to compete on price is a losers game. I agree – but I’m also a realist so let’s step way back and examine the progress of humanity. The reason you and I live in houses, not caves, with running water, and we’re riding in cars, not just walking, is that throughout all of time, a series of events governing availability of goods has taken place. The end result of the process is decreases in price that bring goods and services to the masses.

A creative person will find a way to mashup existing ideas to come up with something new and exciting. Initial production will be expensive and initial adopters, few. Often initial offerings are the domain of the wealthy. Profits at this stage are very low. Envy and the desire to be part of the exclusivity  bring more people to the market.  As more people choose to the pay the price, margins increase and there is profit to be enjoyed. The next step is imitators and duplicators who quickly flood the market and drive down the price. The earliest of these typically enjoy profits. Later, they, and new entrants, fail.

This doesn’t just affect items that can be mass produced.  It has also been the circle of wealth of artists throughout the ages.  Even though they produce one-of-a-kind items, they fall into, and out of, favor.  One artist’s nude male statue is bested by the next artist’s nude female statue.  A new artist enters the fray and will settle for a smaller stipend but produces work of superior quality unseating the current royalty of the field.  As quality artists become abundant, it becomes harder and harder to stand out.  Soon someone is attempting mass production to, once again, increase margins.

Natural economics govern the forward march of humanity and there is no escape.  Talents and time flow to fill unmet needs – every single time – and as they do so, prices fall. Over and over and over, forward movement of all of humanity through all of time has been a function of ever lower prices for more and more stuff. As prices drop, items move from being luxuries to necessities.  The Standard of Living moves ever upward.  Some of us might whine about needing a mansion costing tens of millions of dollars on the best coastline in the world – with 24k gold faucets in our bathrooms but, in fact, just 200 years ago, our we may well have lived in dirt-floor shacks. Our current homes may not be what we want but they are surely far more than our ancestors had and far less than our progeny will enjoy.

There are some instances where nature reaches a limit.  For example, there is a limited supply of emeralds on earth.  As supply dwindles compared to demand, price rises.  As price rises, it becomes worthwhile to spend more money hunting for more emeralds and more and more expensive technology is utilized in the prospecting stage.  In addition, technology drives the desire to duplicate.  At this point only those highly trained, or with sophisticated testing equipment, can tell the difference between man-made and nature made gems.  Even those made by nature are heat-treated or enhanced to make them appear like more expensive stones.  It doesn’t matter whether it’s by duplication or prospecting, and it’s usually a combination, price and demand will attain an equilibrium.

Mickey Drexler, the genius behind The Gap’s explosion, now bringing J Crew to prominence, believes the key to success to be creating something that can not be gotten anywhere else.  That is the way you can avoid competing directly on price. Add scarcity to the equation.  Make no mistake about it, however, you are still competing on price! The value of your scarce item will be balanced against that of your competition.  Since there are other components to value, by making your product unique in some way, you can prevent “lowest price” from equaling “best value.”

When you hear people tell you to not compete on price, what they are really telling you is that you have to offer more value, or different value, than your competition. You are always competing on price because price is a component of value. There really is only one way to win business, and that is to be the best value.  The best value results from either lowering the price or raising some other characteristic that enhances value. Overall, through time, price will drop because when there is failure to add other components to value, the price drops.

That’s why you always have to keep innovating.

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