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.
