Singapore Alliance
of Small Enterprises SASE
For
new ideas, entrepreneurs, start-ups & small businesses & organisations
in Singapore
Thursday, 14 September 2006
BUSINESS
/ MARKETING STRATEGY
Don't
Compete On Price
Is Price
Competition Always Good For The Economy?
To compete,
many novice entrepreneurs are tempted to set unrealistically low, suicidal
prices. These start-ups never survive but also erode the profitability and
long-term sustainability of existing businesses. In everyone’s interest, it is
important to lead new and existing businesses to set the right strategy from
the beginning. To do this, we must first answer “How do businesses make money?”.
How Do
Businesses Make Money?
The profit
and loss statement shows how businesses make money.
|
Revenue |
|
(Expense) |
|
Profit |
How do
businesses increase profit?
1.
Increase
revenue
2.
Decrease
expense
Which is
better?
The Folly Of Price Competition
To compete,
many businesses are tempted to decrease expense; so many cash-strapped
start-ups begin by working from home and using free email (e.g. Yahoo), web
space (e.g. GeoCities), sub-domain, etc. Why?
Competing on cost and price is a risk-free
and no-brainer strategy. All things
being equal, customers will definitely fall for the supplier with the lowest
price. However, this strategy can only work if the supplier is the most cost-efficient. Besides, you can never cut cost to zero. Thus
cost-cutting can never be a viable long-term strategy for most businesses.
To Increase
Share Price, Find New Revenue!
In a
recession, many businesses are tempted to do the easy thing - cost-cutting and retrenchment. They call it down-sizing
but others call it dumb-sizing. Why?
A study on some S&P 500 businesses showed that the share price of those that did not focus on cost-cutting grew faster after the recession. Those
businesses did what was more difficult and
harder to copy – find new revenue (e.g. develop new
products, find new markets).
Can Singapore
Businesses Compete on Price?
Many
Singapore businesses are notorious for competing on price although the country
is an expensive place. Many cannot even compete with Johore
Bahru just across the Straits, and much less with the
numerous dirt-cheap places opening up everywhere (e.g. China, India, Vietnam).
Thus, they
had received encouragement from international brand experts, local politicians,
etc, who had repeatedly urged them to move up the value chain and invest in
brand building among other things.
Singapore
businesses must start learning to grow new revenues and stop leaning on the
government to cut cost and wages. Those that refuse will die the soonest.
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