The Commodity-Pricing Trap
My partner and I have a business that rents photo booths for weddings, parties, and corporate events. My partner has developed software that uses blue-screen technology to create thousands of different backgrounds for the photos, which adds a whole new level of fun. As far as I can tell, we are the only company that offers this. I recently started another business that sells photo booths equipped with the software to people who want to start their own rental services. A large competitor of ours has sold a lot of standard photo booths by saying that a booth-rental business is one of the easiest and least expensive to start up. I know I can beat the company on price, but should I use its marketing approach or highlight the software that differentiates us?
—Jolina Li, Owner, EntrePIXneur, Hartford, Connecticut
When you're starting a business, it's easy to fall into the trap of trying to compete against larger companies on price. That's what Jolina Li is considering—despite having a technology that could provide a strong competitive edge. That would be a big, and potentially fatal, mistake. When you build a business around having the lowest price, you soon find that there's always someone else around who can offer an even lower one. As a result, you are under constant pressure to keep reducing yours. At best, you end up with an unsustainable commodity business that's no fun to run and an obstacle to achieving the goal of becoming economically self-sufficient.
In Jolina's case, moreover, competing on price is completely unnecessary. Her software gives her something extra to offer, which allows her to charge at least as much as her competitors and maybe even more. Either way, she can use the software to carve out a niche for her business at the high end of the market. Granted, some people will be looking for the least expensive photo booth they can find, but they're not the customers she should be going after. Rather, I suggested that she target those who are focused on creating successful businesses and therefore want to be sure to get a booth that comes with the best technology available—namely, hers.
But I cautioned Jolina that a niche lasts only until competitors catch on and start copying you. That's what Jolina's rivals will do if they discover she's siphoning off sales. Yes, she could try to obtain a patent on the software, but the process is lengthy and costly, and there's no guarantee she'd get one.
So, instead, I urged Jolina to start looking immediately for other ways to differentiate her service—preferably through methods that give her a longer-lasting edge. Her partner, for example, could use his tech skills to spruce up the business's website or boost its search-engine rankings. Or perhaps Jolina could establish exclusive relationships with websites that cater to party planners or to people looking for business opportunities. Or she might consider partnering with an organization that helps first-time entrepreneurs get their businesses up and running. That way, she could offer potential customers not just the tools to start a photo-booth-rental business but also the expertise to make it successful. There are many possibilities. I'm sure Jolina will come up with more on her own. The one thing she should not do is build her business around having the lowest price.
NORM BRODSKY | Columnist
Street Smarts columnist and senior contributing editor Norm Brodsky is a veteran entrepreneur who has founded and expanded six businesses.