Low-price competition is a serious threat. How can a small business fight it?
Dear Norm,
A couple of years ago, I took over an online kitchen-supply business that my wife had started with a partner five years before. It was built around a niche product, the Sea Sheller, a tool for opening crabs and lobsters. Recently a large restaurant supplier has started carrying the same product, advertising it, and selling it as a loss leader. If the company is making any profit at all on its Sea Sheller sales, it has to be very small.
This low-price competition is a serious threat to my business. I’m trying to reduce my wholesale costs, but I doubt that our shared vendor will ever give me the same pricing it gives my much larger competitor. (I estimate that I buy about one-tenth as much product as the restaurant supplier.) Any advice?
— Gary Turnbeau, owner
CanDoChefs.com, Yorba Linda, California
It’s tough for small companies to compete in the sale of commodities, and I had to give Gary the bad news that his Sea Sheller had indeed become a commodity. He had little, if any, chance of protecting his niche against larger competitors that could buy from the manufacturer in far greater quantities than he could and that could afford to use the Sea Sheller as a loss leader.
By commodities, I mean products or services that are essentially the same no matter who is selling them and that are differentiated from the others on the market only by price, brand, and perhaps some relatively minor features. Early on, you can get away with charging a premium for the product or service simply because few people are offering it. That was the case with the secure-document-destruction business when I first entered it. It was only a few years, however, before hundreds of other people discovered the opportunity in shredding. Many of them, moreover, were willing to do it for a lot less money than the rest of us were charging. Suddenly what had been a specialized service became a commodity, and prices plummeted.
I told Gary that he and his wife could at least take some satisfaction in having made money on the Sea Sheller for seven years. Now he had to accept that the product was nearing the end of its run, at least as far as CanDoChefs.com was concerned, and start looking for other niche products to replace it. He told me he had some possibilities. It looked, for example, as if paper straws might be making a comeback.
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Overcome Your Fear of Competition
Dear Norm,
In the fall of 2008, I bought a poorly run wholesale souvenir company whose products were popular with gift shops. I’ve since stabilized the business and am now looking at expanding. There is another company that I have not viewed as a competitor, although its products are equivalent in price and quality to mine. Unlike me, the owner has sold the products directly out of her small shop, as well as to a few large retail customers. Now she has put the business up for sale, at a much-inflated valuation. I have gotten in touch with the broker and am considering buying it as a defensive move. I fear that if it is bought by a company with distribution and sales reps in my region, I’ll face stiff competition that will cut into my revenue and erode most of my profit. Even if I get the price down, I’ll have to dip into my savings to do the deal. Do you think I am being overly pessimistic, or are my fears justified?
You should never buy a business for the wrong reasons, and buying one to stifle competition is definitely a wrong reason. As I told the woman who sent me the query—I’ll call her Rebecca—such a move doesn’t really protect you from anything. After all, what is to stop someone else from coming along and starting a business with the same characteristics as the one you’ve bought defensively? You will have wasted your money and, more important, your time and energy, which would have been better spent working on your own business.
Besides, you should never fear competition. Competitors can’t hurt you. You can only hurt yourself. If you offer better products and better service than anyone else, you will attract plenty of customers. I think you need competitors, and it doesn’t bother me to have strong ones. They expand the market, and they keep me on my toes.
That said, you shouldn’t ignore the potential sale of a competitor. I told Rebecca she should see this as an opportunity to increase her business. The broker had told her that the owner was selling because she was spending all of her time on another business she owned. If she’s not paying attention to her customers, now is the ideal time for Rebecca to try winning them away.
How Can A Start-Up Compete Against the Big Guys?
Dear Norm,
Our year-old start-up is a monthly nail polish subscription service that donates 30 percent of its profits to charity. Our competitors are very large nail-polish companies that have an extensive network of brick-and-mortar outlets and huge advertising budgets. They can ship globally. We don’t know how to. They have ways to achieve international brand recognition. We can’t begin to match it. How can we compete?
-George Cuevas, SquareHue, Miami
When you have limited resources, you need to be extra careful to use them wisely. SquareHue is a collaborative venture of three couples–six individuals–all of whom have full-time jobs. So they have limited time and money. They shouldn’t waste either one figuring out how to sell internationally, which raises issues they don’t need to think about now.That’s actually the only problem with having competition from much larger companies: It sometimes leads you to focus on the wrong things.
In talking to George Cuevas, it was clear that he and his five partners are in business primarily to raise money for charity. They are all members of a church that four of them work for. So I urged them to focus on the advantages they have but aren’t currently using.
For example, they had helped stage a church conference for 8,000 people focused on charitable giving. Maybe they can do the same thing with other churches around the country and use the events to raise brand awareness. They can also look for alliances with other businesses that have a charitable focus. I suggested they map out a plan, with specific goals, for the next year or two, and focus on taking advantage of their unique strengths.
