The Race to the Bottom, In Real Time...

We've discussed market building and the effect of market destroyers on markets here before. I just heard about a scenario that is related to this discussion, and points to the fact that healthy competition can cause prices to be kept more reasonable, but when the players are not on a level playing field, market destroyers often self destruct while trying to compete.

Having competitors in a market segment is a form of accountability. No one seller can get away with overcharging or under-delivering for very long, because the consumer has an alternative. Where competition is absent, you usually see both bloated pricing and unresponsive customer service. (Think cable TV providers, and the Department of Motor Vehicles).

When all players in a market are seeking the same things, market share, profit, and growth, the forces governing their decisions are roughly equal, and their costs of doing business are based on the efficiency with which they carry on their operations. Whoever controls costs and sells products, wins.

The situation I just looked at is a little different. It involves a big player,that until recently, was practically the only game in town offering the services it offers. This organization operates on a business model which uses revenues from services sold to its members to promote the organization and to support its large staff. This promotion includes marketing the services of it's members to the public under its seal of approval. Because there has been little or no competition, there has been no check on the prices they could charge members for the services.

When a new player entered the market working on a different business model, the reaction of the big player reveals where they fall in the realm of market building vs. market destroying. See if you can follow. The new group is focused on serving its members and operates as a volunteer, not for profit group. They offer similar services to their members, and charge much lower prices, and they have no paid staff, which means much lower overhead.

Once the big player noticed that there was “competition”, they responded by drastically reducing their prices for the services they sell. How long can they hope to do this? In a previous post I described a similar situation in which Dow Chemical found a way to undersell European chemical producers, who then reduced their prices to a level below Dow's cost. Dow knew that they were losing money on every unit sold, so he began buying as much as he could from them at prices below his cost, selling to his customers at his regular price and made even more money selling their product than his own.

These two situations aren't identical. Dow was selling a commodity, something that is identical, no matter where you get it from, so his customers didn't care where it came from. They were interested only in price, which, for commodities, is all that matters. In our present case, the services sold are similar, not identical, and the profit motive present for the big seller is not present in the new organization.

As long as the volunteer organization is offering a service to its members and the community that is of equal value to the offerings of a paid staff business, and does so at a lower cost, it holds down the prices of both organizations, thus improving the market for their members and the community. They both offer value at a reasonable price.

It also should serve to drive the big organization to improve their product, adding value , and allowing them to charge more. Ultimately, with the chosen business model, that is their only road to success. Currently, the path is to engage in a race to the bottom against themselves.