It Means Your Brand is “Cheap”
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How a Race to the Bottom Hurts Your Business' Bottom Line
How a Race to the Bottom Hurts Your Business' Bottom Line
AuthorBrian Jackson Published November 12, 2020 Updated August 23, 2023
race-to-the-bottom
I once saw a friend of mine almost destroy his business before he finished his first year.
It wasn't because of reckless spending, poor marketing, or any of the common reasons you might think of when we talk about businesses that have failed. In fact, I think he made a mistake that is pretty common across all industries.
Do you want to know what he did?
He created a race to the bottom. Or in other words, he started a price war. Before he started selling his product, he went and researched what competitors in his area were charging. Instead of trying to differentiate himself and charge more (his product is objectively better), he decided that the smart thing to do was to lower his prices in hopes of stealing customers from his competitors.
But his big mistake was that while he charged less, his costs were also higher than the competition due to the quality of materials and labor he needed. He started with a razor-thin margin, and eventually realized he was losing money when production was delayed by even an hour.
Over the next year, it had to dig itself out of a hole that had cost it half its customers and potentially years of profitability.
This story is a pretty drastic example of how a race to the bottom can hurt a business, but I don't think it's a huge anomaly. Industries around the world are trying to see how low they can go in order to reduce competition, and that hurts everyone. Have you heard of MoviePass ?
This is why this trend needs to end. I want to help you understand the details of how a race to the bottom will only hurt your business, even if everything seems fine in the short term. And to start, I want to flesh out the idea of what a race to the bottom looks like.
What is the Race to the Bottom?
Negative #1: Kills Innovation
Negative #2: It Means Your Brand is “Cheap”
Negative #3: It Puts Your Future at Risk
What is the Race to the Bottom?
If textbook definitions are your thing, then you'll enjoy this clarification of the "race to the bottom" from the Financial Times Lexicon :
The situation in which companies and countries try to compete with each other by cutting wages and living standards of workers, and the production of goods is moved to where wages are lowest and workers have fewer rights.
So at a basic level, it's a situation where you lower prices without sacrificing overall profitability. But the harsh reality is that in situations like this, you're always stuck footing the bill.
In many cases, rather than sacrificing quality, a company will choose to reduce wages or working conditions to make the same amount of money at lower costs.
If you want a modern example of this, look no further than the super-competitive e-commerce industry .
Last year, the average price of an Amazon product was about 11% less than its main competitors. Prices ranged from a 1% difference to 17%, which means someone is losing money somewhere.
On the outside, it looks like Amazon is winning. They've turned a profit for 11 consecutive quarters and even took home $1.9 billion in the 2017 holiday season.
But in recent months, some very serious labor abuses have come to light that show where Amazon appears to be saving money. Workers report constant surveillance, being denied a proper bathroom break, and even asthma panic attacks due to the pressure.
While Amazon has since backed away from these claims, it's hard to see them as an ideal business model when you start connecting the dots.
And these trends have even begun to affect the prices set by major retailers in their brick-and-mortar stores. Just look at the price differences of major retailers in the microcosm of Thanksgiving, Black Friday and Cyber Monday.
Average selling price
Average selling price (Image source: DataWeave )
The industry is completely dispersed, and even on the busiest days of the year, it's hard to get a sense of where consumers are actually getting value from these big retailers.
But e-commerce and the retail industry are not the only places where these price wars occur. It is a problem that also affects online freelance communities .
Sites like Fiverr at one point allowed businesses to get products that would have cost them hundreds of dollars for just five dollars. They have since changed their platform to allow freelancers to charge more , but even that was met with a mixed response.
Even the nascent mobile app industry has experienced a race to the bottom, and has only been around for a decade.
When the app store started, you paid for a high-quality app once, and it was yours forever. Now, you can download almost any app for free, and then constant updates are sold or ads are shown for revenue. But again, in these price wars someone has to suffer, and in this case, it's the end user. If this example doesn't scare you, I'm not sure what will. In less than ten years, a new and innovative industry went from top to bottom with as little drama as possible. If you want to make money from an app today, you either have to settle or innovate.
The key to all these examples is that only the big companies, or “ mega brands ,” are coming out ahead in these cases. They are the only ones who can survive this approach, but it is still a practice that smaller companies experiment with.
When that happens, it hurts your bottom line and has some seriously negative long-term effects. I want to take a look at some of them and show you just how bad a race to the bottom can be if you decide to get into one.
Negative #1: Kills Innovation
First, a race to the bottom will kill your hopes and dreams of becoming the next innovative company in your space.
When a company sets out to innovate, there are a lot of factors that need to be considered. In 2011, Harvard Business Review turned some heads when it published a list of nine elements that they called “Critical Success Factors .” Here is their list:
A good reason for innovation
A collective and noble goal for the future
An innovation strategy that everyone agrees on
Senior management involvement
Team-based decision making that supports passionate leaders
A talented and creative team
An open approach to market change drivers
The willingness to take risks, even if it's absurd
Flexible execution parameters
Are you missing something in all this? There is no mention of money, profitability, or anything financial. Some might scoff at that observation, but what seems to be indicated here is that making money is typically a non-factor in true innovation.
Sure, if you innovate effectively, you'll most likely make money. Just look at Apple . They started out making computers, but then innovation happened, and they created the smartphone industry as we know it. Now, their net worth is over $900 billion .
And the evidence of innovation through a positive environment just adds up the longer you look. Here's a great example that was shared regarding how credit unions innovate in the highly competitive banking industry.
Innovation
Innovation (Image source: Ezassi )
Again, very little of this procedure has to do with making money. Even then, it focuses on “ideas or improvements that can be implemented in the shortest possible time, with the highest return.” That doesn’t sound like a reduction in employee benefits to me at all.
What makes that chart even more timely is the ongoing bank price war that threatens to undermine even the efforts of credit union innovators. Once again, the race to the bottom is everywhere.
Study after study has shown that environment is the key to innovation , and we've already taken a long, hard look at the environments created by corporations currently waging price wars. They stink.
And you can’t create a price war and then demand that your culture be innovative. You have to create a space where employees feel engaged and safe enough to want to innovate. Without wiggle room to canada phone number data make mistakes (and potentially lose money), your employees will lack the incentive they need to make real changes.
So the clear winner of innovation strategy is not price. It's culture. Experts who become colleagues and friends are a much better resource for innovation.
But business is all about profit, so we still need to address the money issue through innovation. While culture seems to be the clear winner, it's also worth taking a look at how you can innovate on the fly while making ends meet.
That process was best described by Bridget McCrea in an article published by Ted Magazine . She called it “Cultivating Extreme Value.” In her article, she interviewed Tim Young, a strategist for a business called Interstate Electric Supply . He conveyed this point best in his own words:
“Distributors need to work to innovate, create value and become the ‘go-to source’ for customers making important purchasing decisions.”
What he's saying here is that if companies want to innovate and avoid a price war, they need to focus on creating a product or service that's too valuable to pass up. If its value is good enough, profit and innovation will follow.
Just look at what Southwest Airlines has done to the airline industry if you want a good example of this principle in action. Their “bags fly free” mantra may look like a price war on the surface, but honestly, it’s just a clever diversion of their costs into other areas.
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Home
Resource Center
Blog
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How a Race to the Bottom Hurts Your Business' Bottom Line
How a Race to the Bottom Hurts Your Business' Bottom Line
AuthorBrian Jackson Published November 12, 2020 Updated August 23, 2023
race-to-the-bottom
I once saw a friend of mine almost destroy his business before he finished his first year.
It wasn't because of reckless spending, poor marketing, or any of the common reasons you might think of when we talk about businesses that have failed. In fact, I think he made a mistake that is pretty common across all industries.
Do you want to know what he did?
He created a race to the bottom. Or in other words, he started a price war. Before he started selling his product, he went and researched what competitors in his area were charging. Instead of trying to differentiate himself and charge more (his product is objectively better), he decided that the smart thing to do was to lower his prices in hopes of stealing customers from his competitors.
But his big mistake was that while he charged less, his costs were also higher than the competition due to the quality of materials and labor he needed. He started with a razor-thin margin, and eventually realized he was losing money when production was delayed by even an hour.
Over the next year, it had to dig itself out of a hole that had cost it half its customers and potentially years of profitability.
This story is a pretty drastic example of how a race to the bottom can hurt a business, but I don't think it's a huge anomaly. Industries around the world are trying to see how low they can go in order to reduce competition, and that hurts everyone. Have you heard of MoviePass ?
This is why this trend needs to end. I want to help you understand the details of how a race to the bottom will only hurt your business, even if everything seems fine in the short term. And to start, I want to flesh out the idea of what a race to the bottom looks like.
What is the Race to the Bottom?
Negative #1: Kills Innovation
Negative #2: It Means Your Brand is “Cheap”
Negative #3: It Puts Your Future at Risk
What is the Race to the Bottom?
If textbook definitions are your thing, then you'll enjoy this clarification of the "race to the bottom" from the Financial Times Lexicon :
The situation in which companies and countries try to compete with each other by cutting wages and living standards of workers, and the production of goods is moved to where wages are lowest and workers have fewer rights.
So at a basic level, it's a situation where you lower prices without sacrificing overall profitability. But the harsh reality is that in situations like this, you're always stuck footing the bill.
In many cases, rather than sacrificing quality, a company will choose to reduce wages or working conditions to make the same amount of money at lower costs.
If you want a modern example of this, look no further than the super-competitive e-commerce industry .
Last year, the average price of an Amazon product was about 11% less than its main competitors. Prices ranged from a 1% difference to 17%, which means someone is losing money somewhere.
On the outside, it looks like Amazon is winning. They've turned a profit for 11 consecutive quarters and even took home $1.9 billion in the 2017 holiday season.
But in recent months, some very serious labor abuses have come to light that show where Amazon appears to be saving money. Workers report constant surveillance, being denied a proper bathroom break, and even asthma panic attacks due to the pressure.
While Amazon has since backed away from these claims, it's hard to see them as an ideal business model when you start connecting the dots.
And these trends have even begun to affect the prices set by major retailers in their brick-and-mortar stores. Just look at the price differences of major retailers in the microcosm of Thanksgiving, Black Friday and Cyber Monday.
Average selling price
Average selling price (Image source: DataWeave )
The industry is completely dispersed, and even on the busiest days of the year, it's hard to get a sense of where consumers are actually getting value from these big retailers.
But e-commerce and the retail industry are not the only places where these price wars occur. It is a problem that also affects online freelance communities .
Sites like Fiverr at one point allowed businesses to get products that would have cost them hundreds of dollars for just five dollars. They have since changed their platform to allow freelancers to charge more , but even that was met with a mixed response.
Even the nascent mobile app industry has experienced a race to the bottom, and has only been around for a decade.
When the app store started, you paid for a high-quality app once, and it was yours forever. Now, you can download almost any app for free, and then constant updates are sold or ads are shown for revenue. But again, in these price wars someone has to suffer, and in this case, it's the end user. If this example doesn't scare you, I'm not sure what will. In less than ten years, a new and innovative industry went from top to bottom with as little drama as possible. If you want to make money from an app today, you either have to settle or innovate.
The key to all these examples is that only the big companies, or “ mega brands ,” are coming out ahead in these cases. They are the only ones who can survive this approach, but it is still a practice that smaller companies experiment with.
When that happens, it hurts your bottom line and has some seriously negative long-term effects. I want to take a look at some of them and show you just how bad a race to the bottom can be if you decide to get into one.
Negative #1: Kills Innovation
First, a race to the bottom will kill your hopes and dreams of becoming the next innovative company in your space.
When a company sets out to innovate, there are a lot of factors that need to be considered. In 2011, Harvard Business Review turned some heads when it published a list of nine elements that they called “Critical Success Factors .” Here is their list:
A good reason for innovation
A collective and noble goal for the future
An innovation strategy that everyone agrees on
Senior management involvement
Team-based decision making that supports passionate leaders
A talented and creative team
An open approach to market change drivers
The willingness to take risks, even if it's absurd
Flexible execution parameters
Are you missing something in all this? There is no mention of money, profitability, or anything financial. Some might scoff at that observation, but what seems to be indicated here is that making money is typically a non-factor in true innovation.
Sure, if you innovate effectively, you'll most likely make money. Just look at Apple . They started out making computers, but then innovation happened, and they created the smartphone industry as we know it. Now, their net worth is over $900 billion .
And the evidence of innovation through a positive environment just adds up the longer you look. Here's a great example that was shared regarding how credit unions innovate in the highly competitive banking industry.
Innovation
Innovation (Image source: Ezassi )
Again, very little of this procedure has to do with making money. Even then, it focuses on “ideas or improvements that can be implemented in the shortest possible time, with the highest return.” That doesn’t sound like a reduction in employee benefits to me at all.
What makes that chart even more timely is the ongoing bank price war that threatens to undermine even the efforts of credit union innovators. Once again, the race to the bottom is everywhere.
Study after study has shown that environment is the key to innovation , and we've already taken a long, hard look at the environments created by corporations currently waging price wars. They stink.
And you can’t create a price war and then demand that your culture be innovative. You have to create a space where employees feel engaged and safe enough to want to innovate. Without wiggle room to canada phone number data make mistakes (and potentially lose money), your employees will lack the incentive they need to make real changes.
So the clear winner of innovation strategy is not price. It's culture. Experts who become colleagues and friends are a much better resource for innovation.
But business is all about profit, so we still need to address the money issue through innovation. While culture seems to be the clear winner, it's also worth taking a look at how you can innovate on the fly while making ends meet.
That process was best described by Bridget McCrea in an article published by Ted Magazine . She called it “Cultivating Extreme Value.” In her article, she interviewed Tim Young, a strategist for a business called Interstate Electric Supply . He conveyed this point best in his own words:
“Distributors need to work to innovate, create value and become the ‘go-to source’ for customers making important purchasing decisions.”
What he's saying here is that if companies want to innovate and avoid a price war, they need to focus on creating a product or service that's too valuable to pass up. If its value is good enough, profit and innovation will follow.
Just look at what Southwest Airlines has done to the airline industry if you want a good example of this principle in action. Their “bags fly free” mantra may look like a price war on the surface, but honestly, it’s just a clever diversion of their costs into other areas.