Like all businesses, we generate questions that don’t have easy or obvious answers. The competition is always innovating and that creates pressure from the market to adapt, copy or justify sticking to our guns. For us, we’ve talked on this blog about staged funding and other consumer protection-related issues. We’ve taken a strong position on consumer protection, which is its own double-edged sword. For contractors who think like we do, we have an enjoyable meeting of the minds while we’re deciding whether or not to work together. For contractors who don’t think like we do, those are short phone calls.
Managing a home improvement contracting business, you certainly run across similar decisions. Sometimes they are market positioning decisions but more often I’d bet you address product or pricing issues. For example, if a competitor comes into the market with a lower price on a similar product, do you face immediate pressure from consumers and your sales team to lower your price to compete? Does it make sense to cut your margins to alleviate that pressure or do you find some other way to deal with it?
Unless you are the best in your industry at supply chain management, competition on price is usually a race to the bottom. In a traditional business, this plays out quickly in that you experience your losses nearly immediately and can’t survive long playing a game you aren’t built to play. In a new venture, particularly when VC funded, it can take longer to play out because there’s an expected cash burn rate that can mask fundamental pricing issues (along with the fact that a lot of new ventures aren’t in established markets, so pricing is a guess). With consumer finance, it can take years to play out because the race to the bottom incorporates a risk-reward tradeoff. The reward looks OK until the risk emerges. Then “POOF!” – the finance company is gone. We see this happen with each economic downturn.
Nearly every decision we make as managers comes down to good judgment. We rely on logic and experience (or, more accurately, emotion initially and then create justifications using logic and experience) to do what works best for our businesses. Maybe you’ll respond to pricing pressure by reducing your margins because it is the best decision for your enterprise. Maybe, instead, you’ll ask your sales team to provide their expected value by selling more than price. Maybe you’ll switch product lines or exit products altogether.
Ultimately, this judgment is the difference between success and failure. Exercise it wisely!