One of the most effective strategies to break into a new market and obtain market share is to offer your product or service at a much lower price than that of your competitors. In fact, this was the subject of the very first ETR message: “The Most Powerful Way to Grow a Business”. It is often possible to do this by containing your expenses and being willing to start out with a smaller price margin. And then, once you are well established, to slowly raise your price closer to the rest of the market and increase your profitability further.
I have done this with several types of small businesses (you can learn about many of them in my Microbusiness program) – but for today’s discussion, I’d like to talk about one in particular. Several years ago, I began and became the successful operator of a swimming pool maintenance business. When I started this business, I determined that the competition had a very large profit margin and that I could still make money by offering my service at a much lower price. The strategy worked very well, and I rapidly built a thriving small business. But some problems cropped up that I hadn’t expected at all.
When executing this “discount price” strategy, I had anticipated that I would have trouble keeping expenses low enough to earn a large enough profit. And I was concerned that customers might be skeptical as to the quality or the reliability of my service. In fact, neither of these things happened. What did become a problem was that my competitors became very hostile toward my business and took action to try and destroy it.
One of the things they did was report me to government regulatory agencies for running an “unlicensed” business. You see, in the swimming pool maintenance business, you have to be able to purchase the chemicals you use at a wholesale rate. And this wholesale rate is only available to licensed companies. Fortunately, I did have the license. So this effort on the part of my competitors to shut me down didn’t do any harm. But they did use their clout to make life difficult for me in my dealings with the few pool-chemical vendors in the South Florida market where my business was located.
One very large competitor threatened to pull his business from a certain vendor if he continued to sell to me. Because of the competitor’s size, the vendor, although apologetic, cut me off. I quickly realized that if this were to happen with one or two more vendors, I would be out of business. So I changed my strategy. But I’ll be honest. My first reaction to the hostility was to be defiant. When I received nasty calls, I snarled back at the callers and shouted (with an equal number of profanities) that this was America and I could charge any price I wanted.
But after being cut off from that first wholesale vendor, I realized that what I needed was a strong ally. I contacted one of my other large competitors and told him that I’d like to propose an arrangement whereby he could earn additional profits. I explained that I was a young company with a low overhead and thus didn’t have any repair staff on hand. But my business was growing – and I was finding that I needed to have a way to handle repairs that my customers wanted to have done.
I proposed that this competitor could handle those repairs in exchange for my receiving a small “commission.” The deal made sense and he agreed. I then began using the same vendor that this guy used. (And I made it clear to the vendor that this competitor and I had a “business relationship.”) With a strong ally on my side, I was then immune to the griping of other competitors.