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.

Let us help, if we can...

  Modern Fence Technologies will be hosting free webinars this spring to teach the principles and practices, as well as the benefits of job costing for small business.  While aimed primarily at fence contractors, this information will be helpful to anyone operating a small manufacturing or contracting business. Stay tuned to this channel for more info, or call Mike at 888 456 6786 to schedule a free session for you or your staff.
 This service is designed to be educational, and is offered free of charge to help our customers build their businesses. Tell your friends!

Everything Chinese is not...

                          Definition of Junk: Chinese Trade Vessel

In the following email exchange, Mark Knudson, owner of Modern Fence Technologies was seeking relief from excessive emails from an exporter. He responded to the email with a request that the sender stop spamming him and other members of the North American Fence Contractors Association.

The sender apologized and promised to stop sending. Mark pointed out that he had heard from four members, complaining of this one sender spamming them. The sender then apologized again and said that the goal was to put information in front of potential customers, and started to defend the quality and price of the product offered, and again promised to not send email again.

Mark then responded by inviting the sender to consider joining NAFCA, which would accomplish the goal of putting product in front of potential customers through the regional and international Expos. The response was friendly, with the sender stating that because there is a cost to join, approval from a superior was required, then went on to try to differentiate from all the “many similar emails everyday”, and asked if Mark had ever bought from China and was he satisfied with quality and delivery time.

Mark's response was that the emails are referred to as “spam”, because they are junk. He pointed out that the market is full of junk, and no one likes to put out money for junk. He went on to encourage the sender that there is a right way and a wrong way to do business, and only one way that is sustainable.

Apparently, he struck a nerve. The response was all out of proportion to the discussion, and quite revealing. I'd love to dissect the message in full, but I'll leave that to the reader. I have heard the objection in point three hundreds of times. And not just about Chinese suppliers. U.S. Suppliers run into this same attitude all the time. Everyone wants something for nothing, or at least that's what they want to leave you with. The suppliers that survive this constant struggle are the ones who refuse to sacrifice their integrity or the value of their products to demands for lower price.

The final point devolves into a rant about the U.S. and, if it weren't so serious, would be funny. The sender touches on a faint glimmer of understanding of the point Mark was trying to make, in the line “our quotation is not cheap,but we can guarantee our quality.” Once the sender understands what that statement really means, selling will become much more rewarding.

The fact is, price is never the only objection. It is just the first one that most people will throw at you. Especially in the U.S., where we are conditioned to want to have one of everything, and most people are willing to sacrifice the quality of the things they have in order to cross more lines off their list of things they don’t have.

The only way I can see to reconcile Mark and the sender of these emails is to teach the sender how to sell quality, integrity, service and value instead of price. Until that happens, spammers will be annoyed, and Mark will continue not buying Chinese imports.

          The email exchange is posted here.

Consumers respond to value when it is offered. They respond to price when it isn't.

  How did Ray Kroc, founder of McDonald's, get rich? What about Warren Buffett? Or Henry Ford? They didn't do it by clipping coupons and settling for generic ketchup. They did it by offering the best product in their categories, at the best price possible, (Best, not lowest. A fair price that offers value to the consumer and profit to the producer.), and by building a reputation for offering useful, reliable products.

  Consumers respond to value when it is offered. They respond to price when it isn't. That means that as a business owner, you must offer value to your customer, or forever let your price be set by the guy up the road who is always trying to undercut you. Learn to sell quality products at a fair price and never wonder again if you can make payroll, (or buy name brand ketchup).

  

Forrest Gump's mom was right, "Stupid is as stupid does."

  All right, it's time to 'fess up. I've spent the better part of a year bashing Chinese and other inferior import goods as a poor economic choice. I've insulted the intelligence of people who shop based on price alone. While I could give you all the really good reasons I didn't want to spend a lot of money on good quality tires, I won't bore you with them.

  It made perfectly good sense to me at the time. I put four new 16” tires on my minivan for under $500. For the first two months, everything was great. Then I noticed that the left rear looked low. I checked it, and sure enough, it needed air. I filled it and looked for an obvious leak and found no nails, so I decided to keep an eye on it. For three or four weeks, everything looked fine. Then one morning I noticed it looked low again. Again, no nails, no obvious leaks, and I decided that since I had parked on the street in front of my house, that it was a neighborhood kid goofing around with it.

  Then a week later it was down fifteen pounds. I had parked in back that time. I was getting fed up with filling this tire every week, so I took it to the tire store that sold them to me and they “fixed” it. I don't know what they did, as they didn't record anything on the service record, but I drove away thinking, okay, now I have four good tires.

  Three days later it was down twenty pounds. From that point I was filling the tire every three to four days. I called and made another appointment. They “fixed” it again. Now my tires were five months old, and had been installed and fixed twice by the same shop. Same result. Needed air twice in the first week after the second fix. I was headed out of town for a week on business, and didn't want my wife bothered with filling the tire constantly, so I called back and was told they were “swamped” and couldn't get me in to fix it before I left.

  By the time I got back in to have it looked at again, the fourth time they had the wheel off the van, I was filling the tire twenty or more pounds three or four times a week. I had owned the tires for seven and a half months, and driven just under ten thousand miles. Mostly to and from the tire store. This time I was smart. I walked in unannounced, with my eight year old son, and told them I would wait while they fixed my tire, and that I wanted a full report of what they found, not just a smile and my keys back.

  After over an hour and a half of waiting, (reasonable, given the fact I had no appointment, but irritating because it was my fourth trip in less than eight months), the salesman at the counter explained to me that there was a puncture of the interior sidewall of the drivers side tire, likely from hitting a curb, and that it was an unrepairable condition. I'm not sure I want to know how he drives home, but I do know that if I got an unrepairable puncture, on the inside sidewall of the drivers side tire by hitting a curb, I'd remember it. In fact, the rest of my van would show some signs of ill treatment as well.

  Up to this point in the story, my experience can be chalked up to choosing a poor tire store. A tire made anywhere in the world could have these problems. Here is where quality, pride of workmanship, and value come into play. The road hazard warranty I paid extra for was pro rated. In less than eight months of driving, fewer than ten thousand miles, just over half the tread was worn off this tire. I asked if it was from running at low pressures, and the salesman said all four tires were in the same condition.

  What did I do? I paid the man over seventy dollars to put a replacement tire on, which was half the original purchase price of the tire, plus installation. And I made up my mind that I would not deal with that tire store again, because I am convinced that the leak was present when the tire only had 10% wear, but they jerked me around long enough to get 50% of the replacement out of me. I also did the math, and for 30% more I could have bought American made tires with a tread life warranty to 60,000 miles. That's three times further than I can expect my “inexpensive” (read 'cheap') Chinese tires to run.

  So to all who I have offended in running down inferior imports, I apologize. I am just as dumb as you.