How organized do you think your competition is? Do you believe that they operate on strategies to out-price you or employ sophisticated marketing techniques and long term plans?
When you view the competition, whether that is the car dealer, other jobbers, or national chains, the tendency is to believe that they operate on a sort of master plan. This is particularly true when considering large companies.
From what I have been able to glean from many different companies, though, nothing could be farther from the truth. If you look at the way your operation works, ask yourself if “strategic” is a word that fits well with the way you react to most of your competition. Then ask yourself what makes you think your competition is so different. The fact is that most companies look more organized from the outside than the inside.
The chronology of competition often goes something like this:
Business A, your business, goes to market with a part at price X, which you judge to be an appropriate price point that still nets you a respectable margin. Sometime later (it may be a month or a day or something in between–the time delay isn’t really important), your competition drops its price to X minus, say 10%, in response. Next, you and the others in your market drop your price accordingly. You react to them, they react to you, and everyone ends up making less money.
On the next round of pricing calls by your customers, the whole cycle starts over. While nobody wants to get caught out by having pricing that is not competitive, pricing has too much of an effect on your business to be based solely on a reaction to what other players do in the market, especially considering each of them may be just reacting, too.
A quote from Michael Marn and Robert Rosiello in the Harvard Business Review way back in 1992 illustrates the importance of pricing in any business.
“The fastest and most effective way for a company to realize its maximum profit is to get its pricing right. The right price can boost profit faster than increasing volume will; the wrong price can shrink it just as quickly. Without realizing it, however, many managers are leaving significant amounts of money–potential profit–on the table at the transactions level, the point where the product meets the consumer.”
If you operate under the assumption that your competitors–particularly the larger players–are making changes solely as part of a strategy based on inventory turns, velocity of sales and the like, you may be sadly mistaken. While such pricing reviews may be presented in the guise of a strategy and accompanied by newsletters or press releases, the reality may be much less strategic.
Car dealers are perhaps a good example. Rather than the result of extensive market pricing studies based on statistical reports, trends, etc. those lower prices may just be the result of calls from car dealers to service parts departments complaining that the pricing on certain parts is too high. The company reacts to the complaints, and then the dealer goes to market touting the new pricing.
When faced with that added price competition, you’ll likely do a version of the same–call your suppliers and drop your prices–and then the car dealer will do the same again, followed by others . . . you get the picture.
An important lesson in this is that the impetus for the downward spiral begins with the initial discounting. Understanding this dynamic is an important point because it dictates how you react. If you think that there is a master plan being invoked by your competition, you may believe that your reaction to their pricing will be the end of it.
Once you understand that price cutting is really the impetus for more price cutting, you can see that it really is a fool’s game that does little else other than detract from your ability to offer service and inventory to your customers.
Being competitive on many levels including pricing is important, but without profit you cannot keep your customers happy. And unhappy customers don’t stay customers for long, no matter how low your prices are.
Fall opportunities will fill the September issue with special attention to Batteries, Lighting and Temperature Control service items. We’ll also help get you prepared for ASE Parts Specialist Certification with our Fall Test Preparation Guide.