How not to compete in a crowded market?

Be the same, die with the crowd

Lower prices aren't the issue, shrinking margins are

Before you jump in with Amazon amd Walmart as examples, think twice¹.

Here's a friendly warning upfront: being competitive and providing affordable prices is great. The real concern arises when your only unique selling point is price, and the entirety of your offerings is either outdated or subpar. Who doesn't want a high-quality product at a competitive price? I'm a fan myself. However, many companies, in their quest for price competition, tend to lower their standards, often following this approach:

1. Emulate the competitor offering the lowest quality service or product and produce something equally mediocre.

2. Market it in the exact same way, just a tad cheaper.

   1. First-order consequence : Decreases gross margin

   2. Second-order consequence : Diminished service quality

3. Spoiler : Go bankrupt or raise billions if you are friend with Softbank.

I don't believe entrepreneurship is about making perfect daily decisions and finding treasures that competitors miss..In my opinion, entrepreneurship is more about avoiding the decisions that send your companies right to the grave, with the other fellows who already went bust.

This is why this article is about "How not to compete in a crowded market?", instead of how to build a unique storybrand and design original products. Later in this serialized book, we will see why genuine creation is the best way to avoid competition, but today let’s be less of a dreamer and imagine you are just starting: your product is not finished, and you need to differentiate yourself from the competition.

At this stage, let me address something that some might argue: if you can achieve massive sales volumes, then slashing your margins makes sense. But here's why this argument often falls flat. Firstly, having outstanding distribution is a competitive advantage on its own. My main critique is directed at businesses that can only offer a cheaper price and, as a result, reduced margins and gross profits (if what ever was about profit).

Now, let's assume you do have impressive volume and decide to cut your margins to the bare minimum. While this might work for a time, your business lacks what we can term as a "margin of safety"². You need to have a buffer against unforeseen market changes. Without a solid margin, your business becomes highly vulnerable to various risks: an unexpected rise in raw material costs, renegotiation of contracts by primary suppliers, or other adversarial events.

It's imperative to maintain robust margins.

Race to the bottom

You've got the point. "How not to compete" is about, but not limited to, price-based marketing and massive margin cuts to attract customers and create growth. As your other competitors follow the same approach, you enter a race to the bottom where all of you will eventually fail, either very slowly or spectacularly, as seen with delivery applications going bust one after another, leaving the lion's share to the last alive competitor ³.

Generally, the last company standing often has some unfair advantage ⁴. This might be a longer runway due to financial backing, like a pension fund or venture capital continually investing in an unsustainable business. Alternatively, it could be due to strategic moves in securing resources early on.

A prime example is Southwest Airlines in the U.S. They astutely secured fuel contracts that hedged against rising prices, allowing them to keep their operating costs lower than competitors during periods of high fuel costs. This move not only ensured they could offer competitive ticket prices but also positioned them ahead of competitors. In the turbulent world of airlines, where margins are thin and operational costs high, competitors like Eastern Air Lines struggled and eventually went bankrupt, in part due to not having such advantageous fuel contracts and other financial pressures.

In the current VC-backed landscape, many markets are temporarily broken and dysfunctional due to zero-interest rates. These rates have become the lifeblood for cash-hemorrhaging companies, especially in sectors like retail market delivery and ride-hailing services similar to Uber. Competing on price in such a market isn't just a race to the bottom; it's a plunge into negative infinity, a contest of who can sustain the most losses before crashing most spectacularly. As interest rates begin to rise, these business models find themselves directly in the storm's path. We'll go deeper into this in a subsequent article, but today we will talk about smaller, more realistic ventures.

Selling at a reduced price with diminished margins spells trouble, no matter what you're selling. If you can offer a lower price without compromising your margins, you're on the right track. But if reducing the price means slashing your margins, you're headed for potential failure.

Intangible assets

As a small business owner, your best competitive advantage likely lies in intangible business assets. Let's explain two of them, usually the first ones your large competitors are losing, the ones they can't steal from you because they are bloated, lazy, and obese corporations filled with bureaucrats and corporate hotshots.

Intangible assets are non-physical assets that, while not directly visible or tangible, hold significant value for a company. Unlike their physical counterparts, such as machinery or real estate, these assets can be more challenging to quantify. However, they play a pivotal role in determining a company's success and competitive edge.

One prime example of intangible assets is the relationships a company cultivates with its customers and the unique way it interacts with them. In a word: support. Consider a high-end restaurant that remembers the dietary preferences or special occasions of its regular patrons. This type of service creates a unique bond between the customers and the establishment, making it difficult for competitors to imitate. You might dine a thousand times at a restaurant owned by an impersonal chain, and they'll charge you an extra dollar for an additional slice of bread as if you never spent a penny there. Tailored attention, not just service, becomes a formidable intangible asset because it makes customers love your brand and see it as part of their life. If in doubt, consider how much Warren Buffett emphasizes customer relationships before buying a company.

Your other significant intangible, timeless, and infinitely leveraged asset is your brand. A distinctive brand identity, especially one that dares to be provocative in a traditionally staid corporate landscape, can set a company miles apart from its rivals, adressing consumers needs differently. When many brands opt for the safety of convention, those that challenge the norm, defy expectations, and provoke often stand out for who they are, not just what they sell.

As an entrepreneur, your brand often mirrors your personality. If you mimic your competitor down to their way of speaking, lacking any originality, you are essentially competing to be someone else, and you might eventually face bankruptcy. Cultivate an unoriginal brand, and you risk fading into obscurity.

Decrease your margin without any other advantage, and you'll perish sooner rather than later.

Price-based marketing often leads to a race to see who goes bust first.

Never engage in margin-based marketing; always maintain a business safety margin.

Avoid this especially when competitors have no skin in the game, backed by investors with seemingly infinite cash, merely trying to offset low interest rates.

The first thing your large, bloated, obese competitors lose is their identity and connection with customers. Preserve yours, and you'll succeed.

In a margin-based competition, even the last competitor standing often falls, just more dramatically and later on. If they don't, they likely have either unfair access to strategic resources or deep-pocketed investors willing to spend billions.

Keep the faith,

Voss

1. Whenever I raise that point, people invariably bring up Amazon and Walmart as a counter-argument, pointing to their cheaper options. However, Amazon doesn't just offer products at lower prices; they also excel by providing top-notch logistics, almost instantaneous delivery to your doorstep, and an unparalleled online shopping experience. Place Amazon's products in a shady store in an unappealing suburb, and see how it goes.

2. Not exactly Ben Graham’s margin of safety, but fairly similar.

3. Who may die anyway.

4. Or silly investors with no skin-in-the-game