What would you say if someone told you that they were responding to 600 proposals a year versus 150 in prior years? Who among us wouldn’t like to see that kind of demand for our offerings?
Oh, did I forget to mention that their margins are down double digits? That shines a new light on the subject, doesn’t it? It was at that point that I realized that the business was running this company’s leadership, not the leadership running the business.
There are typically two reasons for the situation described above.
- There’s excess capacity in the market.
- The company is expanding into markets that aren’t as profitable as their primary market.
Let’s look at the implications of each.
When supply exceeds demand it’s typically the result of one of several things – new entrants to the market, lagging demand or a combination of the two. I know that it sounds strange that new entrants would come into a market where demand is lagging, but it happens. It’s especially true in high growth industries just as demand peaks.
Regardless of the reason, there’s price pressure in the market resulting from excess capacity. When this happens the natural tendency is to lower prices to retain market share and/or to expand into other markets.
Lowering prices is a fool’s strategy in which you’re following your competitors down the proverbial rabbit hole. There are no winners in this game. Even the buyers, while enjoying temporary price reductions, ultimately suffer declines in quality, timely delivery and other benefits they previously enjoyed.
But what about a strategy of expanding into other markets?
While many of us think that a company expanding into new markets is a good thing, the reality is that companies seldom calculate the additional value they’ll bring to that market and often choose to compete in these new markets by offering lower prices. The result is that they often dilute their profit margins while increasing their operating costs.
The keys to successful market expansion, which is a viable option when excess capacity exists, are to:
- Make sure that the value you bring to the new market allows you to enjoy margins at least as high, if not higher, than you previously enjoyed.
- Focus your marketing on those value propositions.
- Keep your sales force focused on identifying customers who appreciate that value enough to pay a premium to get it.
Otherwise expansion could prove to be a costly, even fatal, strategy for your company.
There is one more alternative available to you. That is to identify what your most profitable customers would like in the way of enhancements to your offerings and what value those enhancements would have for them. That way you can distinguish yourself in ways that allow you to hold, if not increase, your prices despite ‘excess capacity’ in the market. Indeed, distinguishing your company in this way, while all of your competitors are lowering their prices, puts you in a market all by yourself. You no longer have competitors for what you provide.
That’s how you avoid having the business run you instead of you running the business.