A Race to the Bottom isn’t Worth Winning

I came across a fantastic quote I had never heard before in the business space, which is kind of unique for me. I guess I feel like I’ve seen every, every quote that’s ever been quoted when it comes to business. But this one is good. And it got me thinking about something which I think is one of the main problems plaguing entrepreneurs out there. One of the reasons they struggle to grow. And it’s a very common mistake that we all have made at one point or another, and it might be a mistake that you’re making right now. So hopefully, by talking about it, we can pull you out of that nosedive. Now, the quote was something like this, be careful in a race to the bottom, because you just might win.

I think that might have been Seth Godin. I’m not sure who said it, but in a race to the bottom, be careful because you might just win. The biggest race to the bottom in entrepreneurship is always on price. This is the way that people think that they are going to get customers in the door. They’re going to beat out their competition is by offering the same product at a better price. And so we compete on price, and this just leads to this biding war. And I have been in this know certain commodity type products make it so that you have to play this game. We used to sell hardware for escape climbing, and we sold probably about a million dollars worth of hardware just on Amazon, Amazon alone.

The problem with Amazon is it’s a very price sensitive audience. And so we would be offering our bolts. And these are the same bolts that you could get from a different manufacturer. I’m sorry, from the same manufacturer, different supplier. The way that this would work is that you’d have, like, say, Brighton, this big tool hardware company, they are the ones that are creating the hardware generally, let’s say, and then you, as a distributor or third party packager, you’re taking it in, and then you’re redistributing it and selling it through your own platforms. This is like a very basic version of the business model. And so everybody who has a contract, a distributor’s agreement with, say, Brighton, is going to be able to offer the product at about the same price. There’s not too much savings to be had there.
And in this world, everybody just gets into this biding war where it’s like, how close to break even or even losing money are you willing to go to be able to drown out your competition? And so size scale is something that matters quite a lot in this space, because for us, the hardware wasn’t the thing that we were making our money on, this was our lead magnet, so we could afford to sell a bolt at a loss because we knew that that customer, once they were in our ecosystem, we could upsell them to the other products that we have. And that is where we were going to make our volume, our value from these customers. Our competitors couldn’t play that game. So by and large, we were able to force a lot of them out of the space. They would appear out of nowhere on Amazon, and then they’d be gone in a couple of weeks because we spent a lot of time and energy making sure that we were able to undercut them on price long enough for them to go away. And then we come back, bring our prices back up. But this is a classic example of a race to the bottom, and you don’t really want to win it. We won it because we knew we could play the game on the back end with the other value propositions that we had.
We knew that’s where we were making our value. Our competitors didn’t have that, so they were in a race to the bottom with us, but our bottom was deeper. And this is why you really want to be careful when playing the game, to race to the bottom on price in particular, because you don’t know the capabilities, capacities of your competition. They might be able to outlast you. And even if you can’t, maybe you do win that battle. You have to be careful, because now you have set a precedent in the consumer’s mind that this price point is anchored. That is the value of this thing. That can make it very hard for you to ever bring that back up to an area where you can make sufficient margins to justify the price cut in the first place.
Now, maybe you’re not in a competition with anybody else, and so therefore, you’re not in a race to the bottom with them, per se. But we still have this tendency as entrepreneurs to think the way that we get customers in the door is by offering them discounts. And this is a problem because this is another form of a race to the bottom, which is I will lower my prices on this product with the hopes of getting you in the door so that you buy the thing right. But if you don’t have anything on the back end to then upsell them into later, you are just taking a haircut on your margins on the front end. And a lot of entrepreneurs, a lot of businesses don’t have a multiple, have an ecosystem of products, a suite that complement one another. So you could afford to take that haircut on the front end with that lead magnet, let’s say, so that you can then justify it on the back with the other products. And so you could be in a very, very dire spot right now. So if you only have a single product offering that discount to get people in the door, that’s maybe not the best strategy.
You might want to actually go the opposite way and start positioning yourself as more premium, more luxury on the top end of the scale so that you have more margins to work with. Yes, you’re going to have fewer customers, but you can afford to service those customers in a far superior way than you could when you had razor thin margins. Now, my rule of thumb when it comes to discounts is I don’t like offering discounts to get people in the door. I like to offer discounts to current consumers, current customers to keep them coming back. That’s how I like to use it. So instead of saying, hey, get 50% off of this front end product, I’d rather have them pay full price for that first product and then offer the discount and say, hey, thanks for buying that first thing. Here’s a discount on the next thing. That’s where I like to use it, rather than getting people in the door.

One, because you really start to prime people to expect a discount on the front end, which immediately discredits you as being a premium product. So it’s all about positioning in the mind of your consumer. And I find that discounts on the front end immediately put you on the back foot and put you in a classification of product or service that you don’t really want to be in. You would love your consumer to think, oh, I am a high quality, high value product or service that you should be expecting to pay a premium for because this thing is worth it. That’s really where you want them to be. And then any discounts that they get in the future. Haza. That’s a bonus, but it’s not an expectation.

So I wanted to share this with you because I thought that was a really cool quote. In a race to the bottom, be careful because you might just win. So take that, apply it to your business. Think hard about where are the areas that you’re currently in a race to the bottom and what can you do to pull out of that nosedive and play a different game? A game that’s worth winning. That’s going to do it for me. Guys and gals, I’ll see you in next episode. But until then, stay hyper focused, my friends. Bye.