I was reading a report regarding business statistics, which said something along the lines of 90% of new start-ups do not make it beyond the 5-year mark.
It got me thinking.. if the businesses operate in such huge markets (most of the times), how can the vast majority of them just go broke?
After looking at a couple of successful online marketing and publicity companies, it dawned on me: Most successful companies are using an extremely different approach to market themselves.
Allow me to elaborate: Whereas, for a certain niche, most of the competitors are suggesting rock bottom prices with the best deals possible, that unique competitor is saying our prices are much higher but you can expect our work to not be crap.
Ironically, it is those companies who have a unique selling proposition which stay afloat through difficult times.
The marketing problem, in the end, mostly comes down to pricing. And no, pricing is not exactly what you learnt in marketing classes. The real-world is a lot different from what they teach you in class. If the marketing professors actually knew how to make marketing work, most of them would be making hundreds of thousands of dollars a year. In the end, pricing and marketing both need to be tested and are not what your professors tells you.
That being said, price differentials can affect you in different ways, depending on how you market yourself:
1. You are the lowest cost service provider: This is the category most of the companies (according to me) fall into. The lowest price company must generate a lot more sales and therefore make their competition extremely difficult to breathe, in the end driving them out of business, right? Nope! With this strategy, you are just hoping to generate such a huge volume of sales so that you do not incur a loss. Chances are, if you are the lowest cost producer, your profit margin is slim and as a result your service will be crap.
But hold on, there is another way how it affects the companies. Low prices attract people who are looking for a bargain,Â which most of the time is not one available anywhere in the market. These buyers will ask you a thousand questions, bargain on an already low price, place a very small order and expect a miracle to happen. When they are disappointed, they will ask for a refund. And when you do not issue a refund, they will talk trash.
This strategy does not look too attractive now, does it?
2. You are a premium service provider and charge a lot more than the competition: The problem here is simple. Because you are charging a lot, you are trying to service the top of the market so 95% of the market share is lost, because 95% of the people out there are looking for a bargain.
But the 5% who actually understand the value that you will provide are much more receptive of your services and will appreciate them. Most of the times, it is less troublesome (and more profitable) to attend to a small number of people.
But this approach assumes that you are an expert at what you do. If you know nothing, you can expect your clients to come back and ask for a refund, give you crap AND talk negatively about you to other people. In the end, the 5% market share goes down to 1%.
2. You charge above the average price, but effectively differentiate your services: Smart firms operate in this area because they can charge a higher price and do not have to be the top-of-the-line in their field. The way companies differentiate themselves is by focusing on:
-Exceptional customer service
-Unconditional refund guarantees (risky approach)
-Quick turnaround time
-A special skill that the competition has not yet acquired.
It is fairly easy to say that this segment of any market is fairly larger than 10-15%, which makes the companies earn enough profit to sustain their operations.
Also, the customers who are willing to pay more for a service are simply more receptive to criticisms and less prone to requesting refunds.
Here are some conclusions I have drawn based on my research:
1. Competing on price normally gets firmed killed
2. Servicing people who ARE NOT looking for a bargain will provide the best results
3. Most of your cash will only come from 20-30% of your customers.