Two Beliefs That Will Kill Your Business
Most businesses die! You’ve seen it too many times: someone has a great idea for a new business; they start the business with much excitement and passion. Statistically, somewhere in the not-so-distant future, their passion wanes, frustration mounts, and the business dies.
The SBA estimates that 56% of businesses fail before they reach their 5th birthday. Even if your business is thriving right now, this statistic still has strong implications for you.
At any given time, it’s likely that several of your competitors’ businesses are in the process of dying. They are desperately trying anything and everything to keep their businesses afloat, including drastically reducing their prices. Chances are, some are even selling their products below cost.
Why would anyone in their right mind sell products or services for less than cost? It’s simple; they are desperate for one thing: cash flow. The cash is the vital “oxygen” their business needs to stay alive.
“It’s not the crook we fear in modern business; rather it’s the honest guy who doesn’t know what he is doing.” Owen Young – General Electric
As a small business owner, you perpetually have to negotiate and sell against competitors who are willing to cut their prices as low as possible just to generate some cash.
Being the “smart” business owners that we are, we decide that we too must cut our prices to remain competitive in the market…and the cycle begins.
You cut prices, thus further reducing your profit margin. Reducing your profit margin means less money is left once all the bills are paid. But we’re much “smarter” than the other guy, so we’ll work extra hard and sell more widgets than our competitors…and the cycle continues.
Then it happens. One day you simply can’t maintain enough volume. So, out of desperation, you start thinking like the other guy and decide to further reduce your prices to generate more cash to keep the business alive…and the cycle continues.
“The facts are … that business is not a game of volume. Business is a game of margins.” Dr. Lawrence Steimetz
This vicious cycle of death is the result of two beliefs that will kill your business:
- I have to lower my prices to compete.
- If I just sell more, things will get better.
Let’s look at each of these:
False Belief #1: I have to lower my prices to compete. – This is rarely true. However, most small business owners believe that price is the number one factor customers consider when making a buying decision.
“Cutting prices or putting things on sale is not a sustainable business strategy. …You can’t cut enough costs to save your way to prosperity. I think the question is, ‘What is your relevancy to the life of this new consumer, who is more discriminating about what they’re going to spend their money on?’ ” Howard Shultz – Founder of Starbucks in April 2011 issue of Inc. Magazine
Most buyers don’t make purchasing decisions based solely on price. If this were true, everyone would be driving around the Hyundai Accent GS, the cheapest new car in America, with a sticker price of only $10,665.00. And all restaurants would go out of business, because we know that it’s much cheaper to eat at home or pack a lunch than to dine out.
So, if price isn’t the primary factor when making a purchasing decision, then what is? I’m glad you asked. There are numerous factors (too many to cover here) but here are a few:
- Deliverability – Can I get it when I need or want it?
- Quality – Is this a good investment of my money?
- Peers – What will my friends and family think?
- Alignment – Does this align with my personal needs and desires?
- Relationship – Do we have a good relationship?
False Belief #2: If I sell more, things will get better. – This is only true if you have good margins. If you’re barely surviving with your current margins, selling more will only result in more headaches and the same small profit margin.
If you don’t want your business to become another statistic, don’t participate in the pricing cycle of death. Don’t give in. Instead, give your customers plenty of other motives for purchasing from you.
I would love to hear what you provide your customers and prospects so they don’t have to make a decision based on price. Please leave a comment below.
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