3 Things to Know to Avoid Bankrupting Your Company
During the past few weeks I’ve listened to too many very smart business leaders share their 
perspectives on their strategies about proudly getting involved in something called “The race to the bottom.” If you haven’t heard of this concept, it is defined as a business situation in which companies compete against each other by focusing on operational excellence to reduce costs, wages, and prices to win in their markets. The more costs and prices are reduced by one company in a market, the more others follow until they all get to the absolute bottom and the market implodes and all companies in it go bankrupt. By way of a simple example, mid-tier fast food restaurants such as Fridays, Red Robin, and Outback have been engaged in the vicious cycle of price death by continuously reducing quality, wages, and prices and as a result, have all been perilously close to going out of business for decades.
A more complex example is eCommerce and the evolving concept of the omnichannel that integrates pure eCommerce with traditional retail to offer customers the experience they want, when they want it. In 2017, the average price of a product from Amazon was around 10% less than its top competitors. If you conduct a general comparison of prices for most products you will find that Amazon is consistently 1% to 20% lower than any competitor, which means somebody is losing margin somewhere in the business ecosystem. And everyone in the business world is terrified as Amazon has now posted positive net income for 11 quarters in a row and actually made a real and substantial profit of about $2 billion during the 2017 Christmas season. But if Amazon has unlocked lower costs as a result of unmatched operational excellence, how much further can they and their competitors go? Where does rational business cross the line of irrational business practices that could potentially further reduce quality and worker productivity?
Another interesting industry to examine in understanding issues related to the race to the bottom is the smartphone app market. It’s been evolving for more than 15 years, but when it began, consumers would pay a low but solid premium for a high-quality app that you owned forever. Today, you can download most apps for free, but are then sold updated versions, or become inundated with advertisements that take over not one, but all of your devices.
And finally, there is the Talent Development space which saw the advent of the eLearning phase in the late 1990s when high quality content cost purchasers about $100,000 an hour to produce, to today where you can buy unlimited, crappy, cheap, and ineffective eLearning for your entire company for less than $1 per year per employee. In the race to the bottom of spending money on training, employees suffer and the industry suffers because the model is unsustainable and the experience almost worthless.
So, what does this all mean? What are the implications from a business acumen perspective and what can you do to stop it? Below are three things to think about:
Implication #1 – It reduces the perceived value of your brand
Cutting prices and other costs will reduce your brand equity and “cheapen” the perception of your value proposition. Even if your value proposition is low price, continued price reductions will permanently and negatively impact your brand.
Smart Action – Don’t cut price without significant reason to do it and if you do it, don’t do it often.
Implication #2 – It potentially destroys product innovation
Most companies use profit to fuel the R&D needed to innovate new products and services for their customers. Without profit, there can be limited investment in R&D and without R&D there won’t be new products.
Smart Action – Make sure you are investing in your value proposition. The absolute worst thing an innovative product leader can do is to cut R&D to get caught in the price cutting that leads to the race to the bottom. This is the most certain way to end your company.
Implication #3 – It opens the door to the next disruption
When Blockbuster video started to cut prices in an effort to maintain their customer base after Netflix innovated the pre-paid envelop system, they could never recover and think about new innovations such as streaming video. While Blockbuster concentrated on making more money by selling popcorn at the check-out counter, Netflix was busy disrupting the entertainment industry by inventing in easy-to-use streaming video that downloads shows and movies in just a few minutes. And oh, by the way, they put Blockbuster out of business.
Smart Action – Continue to scan the market to identify the new trends that you should be focusing on instead of getting trapped in the race to the bottom.
