PRICING

Should You Sue Over Sour Grapes?

When one business rocked an industry's boat--fairly and legally--its competitors played dirty. Is the answer a lawsuit?
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Dear Norm,

In 2007, I launched a brokerage business to sell certain luxury items. I saw an opportunity, because everyone in the industry was charging the same commission. I concluded that I could provide excellent service while charging 30 percent less.

In four years, we became the industry leader in our region. So we decided to expand into a larger market. This evidently alarmed established brokers in the new market, who put pressure on the two key industry magazines. One magazine forbade us to mention our lower commissions in our ads. The other banned our ads altogether.

This seems wrong to us and probably illegal. Should we sue the magazines?

--Name withheld

When business owners face pressure to reduce prices, I usually advise them not to discount but to add services instead. There are circumstances, however, in which I think it's smart to compete on price. The reader--I'll call him Ed--describes one of them. He's talking about an industry with an antiquated pricing structure. The players are comfortable with practices that have been around for decades and don't want anyone to rock the boat by offering customers a better deal.

In fact, Ed is in the type of business I most like to compete in. There are three characteristics I look for. First, the industry needs to have been around for 100 years (so you don't have to educate the market about what you do). Second, it should be antiquated in some way. And third, it should be possible to carve out a niche. That was the situation of the records-storage industry when I entered it. My success was based on an innovation that allowed me to undercut my competitors on price and yet maintain hefty gross margins.

As for Ed, I advised him against suing the publications. The case would take so long to litigate and cost so much money that he'd be worse off at the end even if he won. Instead, I suggested he have his lawyer send letters to the publications, putting them on notice that they are acting illegally in restraint of trade. In the letters, he should emphasize the choice he's offering customers. Some people, after all, don't like negotiating commission rates. By charging a lower, nonnegotiable rate, Ed is giving them an alternative.

Beyond that, I urged him to just keep at it, using whatever promotional tools he has available. The word will spread, and eventually the rest of the industry will come around. It happened to me. It will happen to him.

 

IMAGE: orangesparrow/Flickr
Last updated: Mar 18, 2013

NORM BRODSKY | Columnist

Street Smarts columnist and senior contributing editor Norm Brodsky is a veteran entrepreneur who has founded and expanded six businesses.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.



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