Making more profit is not always a good strategy.
The mobile phone business has always been cut-throat, as a myriad of suppliers chase network operators for their volume mega-deals.
You live or die by those deals and you compete with your competitors on a combination of price and user experience. Those mobiles with an amazing UI sell at higher prices than the average ones.
My mobile businesses were always at the ‘value’ end of the market, because I relished the extreme competition and became pretty good at creating the best value propositions in the market at a given price point. We were often the price leader.
But one of the keys to a successful product range is cost – specifically, if you’re going to go head to head with your competition, then you must have the lowest product cost. That applies in any competitive industry where you make things.
I spent lots of money on my benchmarking team; buying my competitors’ mobile phones, taking them apart and understanding their cost structures – materials and manufacture. Then I’d project forward what their cost might be in a year’s time when my next product came to market and I knew I needed to get below that to win. We called the process experience curves.
Once you have the lowest cost you have an important tool to eliminate your competition. Bad profit is the profit you make that allows your competitor to also make a profit. Good profit is when you are selling at their cost – zero profit for them – but still making a profit yourself. Pretty soon they will get out of the market because they can’t make money. Then you can step in, take their share, increase your volume and get an even lower cost with purchasing and productivity improvements. I would, from time to time, go to my customers and reduce the price so I made less profit, but my competitors (who would have to follow the price move to maintain their volume share) made nothing. Volume with no profit is not a business.
If you’re in a highly competitive business, where price is key, and you are aiming to grow your market share, you must have the lowest cost. Study your competition in great detail (I’m not talking espionage or anything fancy here, just a bit of benchmarking), understand their cost base and get below it. All other things being equal, you will win.
And remember, price and cost are not necessarily bed-fellows. You can have the lowest cost and the highest price. Then the difference is marketing.
Comments