The Race to the Bottom for Wedding Businesses
There is an interesting phenomenon out there that takes many forms in economies across the world. It’s called the “race to the bottom” and wedding businesses are no more immune to this than other businesses out there. So, after reading a recent blog post by Seth Godin, I thought I would touch on how this can affect our businesses and industry and why it probably isn’t such a good strategy for someone who’s in it for the long term…probably the reason why Godin says “the race to the top makes more sense” to him.
First of all, it’s important to note the importance of competition. Competition keeps us honest and fair. It’s good for businesses and good for consumers. Sure, we’d all like to cover our entire niche and take on as much business as possible but, in reality, there’s no way we can serve the entire market. Also, if we were the only ones doing what we do, there would be less of an incentive to innovate, add value, and do our best…competition makes us stronger.
However, when you’re in a market that is as competitive as ours, it can be overwhelming and cause people to make poor business decisions, creating a slippery slope, all the way to the bottom.
Here’s an example of the race to the bottom…Let’s say that I’m starting a tablecloth rental business. The first thing I do is survey the market and see what everyone else is charging for tablecloths. There are some that charge $10, some that charge $12, and some that charge $15 for the same cloths. Since I’m going to start doing this out of my home, I figure my cost per tablecloth at $5 including washing, pressing, and overhead. So, realistically, I can charge $6 and still make a profit. However, being the smart businessman that I am, I know that I can charge $10 and make a pretty good margin. Now, I’m not privy to all the details of these other businesses. I assume that the company charging $15 has higher costs than me and are maintaining a prescribed margin. However, I have the lowest price and will market that as the reason I provide value to customers. Orders start coming in and I’m excited. The other companies start seeing a drop in their businesses and they’re not so excited…they have to now react. Now begins the race to the bottom.
Naturally, many people respond to this by lowering their price to meet or slightly beat that of their competitor. This lowers the overall market average price for tablecloths as well as the expectations of customers. Why would you pay $15 for a cloth when you can now pay $9? Prices go down, profit goes down, people are working harder for less money…and they blame it on competition. Competition is not the enemy here, a decision to join this race is. You can see how this cycle can repeat and push the price back even more: from $9 to $8 to $6, etc. Each time, everyone who participates is making less money until someone is forced to bail out because they’re working too hard or just not making enough.
Another unintended consequence is that the overall customer price expectation decreases…people will simply refuse to pay more than what they’ve been used to paying. When those competitors go out of business, you simply can’t just raise the price again.
So, what do you do? Pricing is important but it is not the only source of value to customers. Instead of lowering the price, look for other ways to add value to the transaction. This could include having a great showroom, guaranteeing delivery times, having a nice and knowledgeable sales staff, being more than just an order taker and actually offering decor and design ideas, etc. If a bride comes to you and has a great experience, they’re not necessarily going to leave to go find someone else who charges a couple dollars less per cloth. This is racing to the top. This increases a bride’s expectation of service and value and actually makes room in the value perception paradigm for higher prices and increased profit.
Now there will always be those budget brides who focus on only price and that’s fine. Let those who want to race to the bottom and race out of business fight for them. Set your standards high and create a value-filled experience that cause brides to adjust their value perception paradigm upwards…if you can offer great prices too, even better!
Economies of Scale
I would be remiss if I did not mention one important point. If you are performing at high levels and are able to experience certain efficiencies, such as economies of scale, than lowering your price is not necessarily taking part in the race to the bottom. I see this all the time in the catering world…it really doesn’t cost me that much more to do 50 to 100 more of something if I’m already doing 50 to 100 of it…just really the cost of the product and minimal labor. That being said, if I can identify that efficiency and leverage that into a lower price that secures me a deal that I may not get at my higher price, that’s fine…that’s my reward for being efficient. However, competitors react to that by lowering their prices, they begin to engage in that race towards the bottom that ultimately hurts them the most. The same can be said for people with low overhead…keeping your overhead low means you can make the same amount of money at lower prices, your reward for being efficient with your expenses.
Following the Rules
I’m a caterer…and so is everyone else in town, and their moms, aunts, and cousins. And these people cater illegally from their homes, do it as a side job out of their church, have no insurance, permits, licenses, overhead, etc….and charge way less than I do. They are breaking the rules and seem to be benefiting from it. However, what I’ve learned is that instead of complaining about them, I can use my following of the rules as a point of value. I don’t have to play their game. I don’t have to set prices according to what they are doing. I just have to communicate to my customers what it truly means to be the one who follows the rules…I won’t run off with their money. My reputation is what secures future business so I WILL do a good job. I’m insured so you’re insured. My food won’t make anyone sick. My facilities are clean and safe. My staff is trained and WILL NOT wear sweatpants to your wedding. I will be there on time, not 45 minutes after the reception starts….
One last note…many wedding vendors fail to allocate enough value to their time and consequently, as the race to the bottom ensues, end up working a lot of hours for next to nothing. This happens when they reduce their prices to get a deal but work the same amount of hours they normally do, thus reducing their average hourly rate for the work they do. This also happens when they offer to do more without adjusting prices sufficiently which again, can drastically reduce their hourly rate. In my experience, this is especially true of planners, cake decorators, and photographers whose services are made up mostly of time.
What do you think? Has this happened to you? What steps do you take to avoid the race to the bottom?
-Featured Image by familymwr