As markets mature, demand plateaus and competition gets intense. This WSJ article talks about some of the challenges American companies are facing as they try to grow their revenue.
The expert quoted in this article says – “When you have such weak top-line growth, such weak demand, the competitive environment becomes much tougher, one of the ways to compete for top-line is through price.”
Most of the companies stated in the article operate in B2B markets (except Starbucks, Harley Davidson), and nearly all of them are in mature markets. Demand in B2B markets is a function of the end users’ demand for your customers products (see: derived demand). As an intermediate in this value chain, your product and its price is several steps removed from the end user. Therefore your ability to influence volume by lower price is pretty much nonexistent. In other words, you are operating in an inelastic market.
Any increase in volume is usually from the customer switching volumes between vendors. The market as a whole isn’t buying more, they are merely moving their volume from another competitor to you.
What is the problem with this you ask? Any competitor can just as easily lower their price too, creating the same relative position you had before. Only this time at a lower average market price, hurting industry margins. Any advantage you thought you created by lowering your price is short-lived and isn’t sustainable, unless you have a serious cost advantage over your competitors (such Amazon with AWS.) That’s for another post.
The “street fight for market share” as stated in the article is a dangerous (and an expensive) one to fight. Maybe its time to focus on the one key metric for any business – profits.
Image credit: Trak.in
Ashwin Somakumar 