Practical Ecommerce

You’ll always lose a price war

Competing on price is a stupid tactic because it’s easy. Any idiot can undercut his competitors. Making money with this tactic, however, is rare. Only a few companies can pull it off because it requires extreme scale and a laser-like focus on cost at the expense of all other brand-building activities.

Low cost as your brand identity is foolish. You’re setting yourself up for failure. If anyone undercuts you, you look either incompetent or untruthful. Plus, if the manufacturer sets a MAP — minimum advertised price — you have zero competitive advantage. So now what do you do?

Customers still expect a high quality of service. Even if you’re willing to get by on razor-thin margins, your customers aren’t going to cut you any slack on the service side of the business. However, in order for you to maintain your super-low prices, you have to cut corners somewhere. If service doesn’t suffer, your profit will (see Amazon).

It’s always a race to the bottom and you’ll lose. If the low-cost angle worked well, every store would do it. But customers look for more than cheap prices. All you’re doing is reducing your profit.

Bargain hunters are only loyal to the price. You need repeat business in order to survive in small business. The customers you pull in through your super-low prices are persuaded purely by price. Their brand loyalty will quickly evaporate if you are ever undercut on price by a competitor.

Customers will reward added value. Amazon’s brand is low price, cheap and free shipping, wide product selection, and fast delivery. Don’t compete against that combination because it isn’t profitable. Look up Amazon’s financials. Instead, develop a unique product combination, curate a carefully selected and tested product grouping, or offer value-added services that the low-price guys couldn’t be bothered with. Follow that up with competitive, but fair pricing on your merchandise and shipping rates, and watch your business boom.

Avoid selling products from manufacturers who don’t protect their prices. We turn down a lot of really interesting and potentially good-selling items because the manufacturers don’t weed out resellers that devalue their products. Manufacturers should be vigilant against resellers operating bargain-basement eBay and Amazon stores. It hurts everyone, but nobody more so than the manufacturer. New resellers will be hesitant to take on a product that is being readily advertised and sold at unhealthy margins.

“What do I do if the products I sell don’t have MAPs and my competitors are undercutting me on price?” You have a lot of options. You could talk to your suppliers and ask them to create a MAP. You could create added value by creative merchandising of your products. Personally, though, I would simply stop carrying that product and focus my time elsewhere. Remember, there are always other products to sell.

“But I can’t stop carrying the product. It’s essential to my store.” Then perhaps you need to rethink the strategy of your store. If your store doesn’t make sense without this item or line, then perhaps you need to pivot your store so that it does make sense. If that’s impossible, you need to change the mind of the manufacturer. If you cannot change the manufacturer’s pricing policies, then you must change your store. There is nothing to gain from engaging in a price war with your competition. If the margins are unhealthy, stop bothering with it. Move on to something else. There are literally millions of things to sell in this world.

“It sounds like you’re advocating price fixing from your manufacturers.” No, I’m advocating work. No one ever said, “It’s the cheaper mousetrap that wins.” We’re in retail. We don’t invent mousetraps, but we sure as hell should be inventing better ways to market, merchandise, and sell them. If the only tool in your arsenal is price, I think you’re a weak competitor. I will either outwork you or outthink you. You are not unique.

There is nothing I like more than competing on value. Apple doesn’t allow its resellers to engage in price wars. The resellers must compete in other ways and this is what you should crave as a retailer. It gives you the opportunity to compete on service and added value. Remember, any idiot can lower a price. You could be bigger than Amazon tomorrow if you sold everything it does, but for $0.01.

The bottom line is all that matters. Top line revenue is simply part of the crap on the left side of the equals sign. All that matters is the number on the right side: profit. Your kids can’t eat revenue. Using price to increase your top line at the expense of your profit is a complete and utter waste of time.

“But can’t I always increase my prices once I’ve achieved market share?” Sure, good luck with that. First impressions are nearly impossible to change.

You will not win a price war. This bears repeating. Amazon has waged a price war for years. What has it won? It doesn’t turn much (if any) profit. What’s the point of business if not to turn a profit? From a small business perspective, Amazon is a waste of time. You cannot compare how a public company operates to your small business. Do you think you’ll be able to live while earning 0.3 percent profit? That’s $3,000 on $1 million in sales.

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Comments ( 4 )

  1. Carlos Rivera May 13, 2014 Reply

    Amen! This should be the first article read when opening an eCommerce store. Sadly, thousands will take the low-price path everyday. :(

  2. Andy May 13, 2014 Reply

    You should be given some type of award for this article. NO one understands this. I am glad people don’t. It will just increase my competition if they do :-) Low prices is a suckers game. it can only be played by global conglomerates Like Sprawl-Mart etc. The rest of us actually need to make money to pay our bills.

  3. Mark May 13, 2014 Reply

    Nice in-your-face article, Jamie. Many small businesses shoot themselves. They price low thinking they will capture business from the big fish. They do, but then witness steep customer attrition when they try to unlock themselves from the low (and unprofitable) prices they set.

    The one thing I will comment on about Amazon is that their focus isn’t profit. Their focus is revenue and stock ticker management. It’s sad, but true.

    • Jamie Salvatori May 13, 2014 Reply

      Mark, you’re right that Amazon’s focus isn’t profit. That will come “later” they say (or at least investors think). The prevailing “wisdom” is that they could increase their profit 25X if they simply stopped investing heavily in their infrastructure and technology. Yeah, OK, then why haven’t they yet? If it requires being nearly unprofitable to succeed in their market, why do they still have competition? I don’t get it because I’m not smart enough. My business (and yours too, probably) requires earning a profit. So forget about Amazon and base your decisions upon sound business principles.

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