A race to the bottom is a no-win race.
If you’ve been selling anything on the internet for a while now, you more than likely are dealing with the same headache as everyone else. Namely, increased competition while profit margins dwindle away. You’ve been struggling with what to do – sales are falling as your customers are buying the same product at a lower cost from megastores like Amazon or unauthorized dealers who don’t comply with MAP rules.
So then, your choice is rather straightforward. You can either:
a.) Try to compete on lowest price
b.) Provide some form of added value that your competition can’t
But you’ve heard this argument before, haven’t you? Countless other ‘experts’ have said that competing on lowest price will get you nowhere, but how can you be sure unless you try?
I’ll tell you how. You run some pricing scenarios with this EBITA calculator.
But before you click that, let’s do a quick example to prove the point. Here’s the test scenario:
You’re selling a consumer electronics item we’ll call – product1. We’re not estimating shipping into this, just to keep things simple.
Scenario 1 – the way things were
* Product1 costs you $600 and you sell 100 of these with a 20% markup.
* CC processing runs you 3% and you pay 5% to your phone sales staff
* Selling price per product is $720 ($120 margin)
* Total revenue – 72k
* commission and cc fees total up to $5,760
* Earnings before interest,tax, depreciation and amortization (EBITDA) = $6,240
Scenario 2- the ‘low-baller’
Everything else is the same, except for the following.
* Product1 costs you $600 and you’re now selling 150 at 10% markup.
* CC processing runs you 3% and you pay your phone sales staff 2% commission.
* Selling price per product is $660 ($60 margin)
* Total revenue – 66k
* commission and cc fees total up to $4,950
* Earnings before interest,tax, depreciation and amortization (EBITDA) = $4,050
Ouch! So you’ve sold 50% more product and you’ve still lost money at the end of the day. In fact, you’d have to sell more than double (214 vs 100) what you used to sell just to stay even with your previous EBITDA.
Still feel like competing on price?