Low-price competition is a serious threat. How can a small business fight it?
Norm Brodsky is a veteran entrepreneur.
Dear Norm, A couple of years ago, I took over an online kitchen-supply business that my wife had started with a partner five years before. It was built around a niche product, the Sea Sheller, a tool for opening crabs and lobsters. Recently a large restaurant supplier has started carrying the same product, advertising it, and selling it as a loss leader. If the company is making any profit at all on its Sea Sheller sales, it has to be very small.
This low-price competition is a serious threat to my business. I'm trying to reduce my wholesale costs, but I doubt that our shared vendor will ever give me the same pricing it gives my much larger competitor. (I estimate that I buy about one-tenth as much product as the restaurant supplier.) Any advice?
-- Gary Turnbeau, owner CanDoChefs.com, Yorba Linda, California
It's tough for small companies to compete in the sale of commodities, and I had to give Gary the bad news that his Sea Sheller had indeed become a commodity. He had little, if any, chance of protecting his niche against larger competitors that could buy from the manufacturer in far greater quantities than he could and that could afford to use the Sea Sheller as a loss leader.
By commodities, I mean products or services that are essentially the same no matter who is selling them and that are differentiated from the others on the market only by price, brand, and perhaps some relatively minor features. Early on, you can get away with charging a premium for the product or service simply because few people are offering it. That was the case with the secure-document-destruction business when I first entered it. It was only a few years, however, before hundreds of other people discovered the opportunity in shredding. Many of them, moreover, were willing to do it for a lot less money than the rest of us were charging. Suddenly what had been a specialized service became a commodity, and prices plummeted.
I told Gary that he and his wife could at least take some satisfaction in having made money on the Sea Sheller for seven years. Now he had to accept that the product was nearing the end of its run, at least as far as CanDoChefs.com was concerned, and start looking for other niche products to replace it. He told me he had some possibilities. It looked, for example, as if paper straws might be making a comeback.
Please send all questions to AskNorm@inc.com. Norm Brodsky is a veteran entrepreneur. His co-author is editor-at-large Bo Burlingham. Their book, The Knack, is now available in paperback under the title Street Smarts: An All-Purpose Tool Kit for Entrepreneurs.