Some years ago when I was selling capital equipment we participated in an internet auction. The potential client was one of our bigger customers and the project was around a half a million dollars in value so it was a good opportunity, although internet auctions weren’t our favourite way to sell equipment due to the emphasis on price.
Our primary competitor was the industry leader and this was one of their strongest products, but we had comparable technology and were somewhat smaller so hopefully our lower overhead would allow us to offer a better price. We had a reasonably good ERP system and had a solid handle on our costs, so we decided on a competitive margin and came up with our lowest possible offer. We not only lost the order, but our competitor’s price was so low it was well below our cost, much less our asking price. After much gnashing of teeth and discussion, we had to assume that our competitor knew something we didn’t and just had better control of their costs.
Fast forward a few years and low and behold our esteemed competitor that had once been an industry favourite was bankrupt and shutdown. During an interview one of their former managers said “We never really knew if or how much money we made on a shipment”! Aha! The truth comes out, after all these years!
Turns out they had an ancient ERP system that was so old and clumsy that they couldn’t get any consistent data out of it, their pricing was a total guess. Needless to say, once the technology gap between themselves and their competitors narrowed and the declining economy made competitive pricing a priority, they either lost bids or lost money on the projects they won (including ours), eventually going broke.
The morals of this story:
Your competitors are never as good as you fear. Everyone has to work with the same raw materials and the same people with all their habits and foibles. As industry conditions and the economy change, their weaknesses will eventually come out.
The flower of success contains the seeds of failure. My former competitor had been the industry leader for many years until the economy started to slow down. Once price become the biggest factor for their customers in a slowing economy, what had been a minor problem became a fatal cancer.
Put systems into place before you need them. Business conditions change all the time, you have to be ready for every eventuality. Upgrading software such as ERP or implementing new procedures is a lot easier when you’re on top than when you’re on the way down, it’s tough to fight momentum.
Understand and control your costs. While you might think that selling price is not a major factor in your success today, controlling your costs is. SME’s often aren’t overly concerned with controlling costs as long as they make a profit at the end of the year. As they grow and get involved with larger projects small variations can grow out of control. The sooner you can get control of your real costs and identify what needs attention, the better.
And above all, avoid internet auctions, they’re abominations!