"There’s cost, quality and service," goes the old saw. "Pick two." They don't tell you this is the short form of the rule. The full story is, "I can't give you low cost, great quality and fast service unless I change the way I run my business; and I’m not about to change."
Yesterday I bought a copy of a great old Robert Heinlein sci-fi story for $1.25. The copy is flawless and it was delivered to my office one minute after I placed the order. How's that for cost, quality and service? Of course it’s not a traditional paper book. With Amazon’s help, the book guys rethought the way they deliver stories. I also had to team with them by buying a tablet to use the new book format, but everybody’s better off now. Everybody who isn’t stuck in literary old-think, that is. Those guys are hurting. Oh, and you know who came up with the first mainstream reading tablet? It was the world’s biggest dealer in traditional books.
If you are worried about your competitiveness, you’re probably right. But assuming the validity of the old "pick two" response will almost certainly give you a wrong answer. The competitiveness solution isn’t usually price; in fact price is often the worst way to compete. Quality and service can put you in a position to maintain a price premium in most businesses. Cutting your price means you have to increase your sales volume just to stay even. Since falling sales is usually the first sign of competitive pressure, price cutting will usually compound the problem, not solve it.
Cost control is still important, of course. You have to be on guard against waste all the time. But your cost controls only your minimum price. Maximum price is set by the market. You need to be pricing in a market that wants your goods and services – yours specifically. Then your market price can be well above the cost-driven minimum. Quality and service, usually driven by innovation, can provide this kind of competitive advantage.
I suggest three questions that might help clarify your situation and point to your next competitive step. The first two are borrowed from old-time value analysis consulting:
- What value or benefit is your customer buying from you? Yes, what he purchases is a product or service, but it is often true that he wouldn’t want that product in its present form if he could find a way to get his benefits without it. In the example above, a few people love the look and feel of books, but most of us just want the words.
- Has anyone else already found a way to change the game and deliver the same value you do without the cost-generating methods you use? Online retail provides dozens of good examples of merchandising without the expense of a chain of storefronts. You may even find it’s not an either/or situation. I know a bicycle shop owner who now makes half her profits from online sales of the same clothing and accessories she used to carry just for walk-in trade. High end cycle clothing is hard to find outside major cities. There’s no way my friend could have carried her current inventory just for walk-in business. Thus, the web sales support her store with the customer service that comes from a much broader inventory.
- Can you add products and services that will increase the spending of existing customers? This can be higher-quality products or complementary products and services, and not just in retail sales. Equipment OEMs now offer training and maintenance support with their equipment that they never did in the past. Motorcycle manufacturers and dealers often make as much profit on clothing and other lifestyle items as they do on motorcycles and service. Most will sell you insurance, too.
Business redefinition is sweeping through US: Steel production used to be such a costly, environmentally ugly process that major producers were being driven out of the business. Smart competitors redefined the industry. Now over 90% of US steelmaking capacity has gone to recycling, using arc furnaces instead of Bessemer converters. The space they have reclaimed from polluted auto boneyards is probably the size of a small state. Natural gas, much of which used to be flared off as a waste product at the wellhead, is now a valued byproduct of oil fields and landfills. High quality coffee now sells for $5 a cup in stores that also provide informal branch offices with Wi-Fi for road warriors. Now that Ma Bell has to work for a living, the telephone is your constant companion, secretary and advisor, and you’re probably paying over $100 a month for the privilege of carrying it. How's that for brand extension?
If you hear the stomping of competitors’ boots behind you, cutting your price is probably not the most useful response. Think outside your box. Heck, get rid of the box. Your customer never wanted it anyway.
Read Stanton McGroarty's monthly column Strategic Maintenance.