The pain (and magic) of competition

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Business competition creates both challenges and opportunities. The ideal self-interested business model is a monopoly, of course, if you can get away with it. (Our primary Ontario Construction News competitor had a three-decade, legally mandated monopoly for several decades, and based on the evidence, we believe pulled more than $6 to $12 million a year or more in tiny legal notice advertisements.)

But monopolies are costly to innovation, and certainly to the overall economy. Since we arrived on the scene, the competitor has spiced up its service — in fact introducing a new tool that is good enough that we have decided to play “catch up” and match it (while of course carefully respecting copyrights and intellectual property.)

As I have noted earlier, a second competitor has appeared on the scene, with some formidable advantages, at least on the surface. After passing through the initial emotional the sinking sensation of “oh, no, there goes our market advantage”, we took a rational look at the picture, and formulated our responsive strategy, most of which of course should remain private. There are some zingers in the picture, along with a few really quick fixes but we expect almost no one outside our organization will see much of any obvious response.

The end result will be, we think, that our product will improve even more, as our market share gains ground.

We know a few rules about competition and marketing.

First it is rarely helpful and usually harmful to “dis” the competition in public and certainly it is never useful to put down the competition among current and potential clients.  Negativism of this sort generally backfires; it draws attention to the competition, and since the individuals hearing our complains know our implicit biases, they take everything we say with a very large grain of salt.

Second, it is almost never harmful to play copycat with genuine service improvements and value added offers, especially if they truly are inexpensive to implement. We for example decided on a change that results in us cutting a large amount of fine print from our offer, for potential revenue that we’ve assessed would be at most a few thousand dollars a year (and so far has earned us the grand sum of $200.)

Third, price cutting to match the competition should be a last resort, and only done if and when you can “wall” it so that it doesn’t cannibalize your existing business. We’ve certainly set a much lower price than our primary competitor — this is one of our biggest advantages — but we know that the competitor would be cutting its throat by reducing its prices. Reason: if the competitor has 90 per cent of the market, and our prices are 50 per cent lower, they’ve just blown away more than 45 per cent of their pricing power — which would represent almost pure profit margin. Of course the same story applies if the shoe falls on the other foot. If we have a lower price competitor and try to match its pricing, we’ll just blow our margin with existing clients to the point that it would take an almost unimaginable business volume increase to make up for the revenue loss.

In mature, extremely competitive markets, of course, the price war problem can be severe and there are a number of challenging fixes — such as how conventional airlines unbundled their products to create “basic” airfare classes to match low-cost competitors, while offering “premium economy” service for people willing to pay a little more for a more pleasant environment. But these are costly strategies, which we’d rather avoid.

Finally, and perhaps most importantly to this blog, we’ll continue to step up our marketing — specific strategies will remain confidential, because, of course we don’t need to give away our game to our competitors. The results to date are certainly effective. While we still only have a fractional market share, the business has attracted enough new (and new repeat) clients to reach solid profitability in less than six months of operation. It’s exciting to grow, despite, or perhaps because, of the competition.

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