The Competitive Fallacy, Cake Mix and the $30 Pizza

Posted by on October 21st, 2013 - comment(s)

I cringe every time I hear it – “I can’t do it, my competition has too low a price, I can’t possibly compete!”

This is the competitive fallacy: a need for entrepreneurs to compare themselves to the rest of their market and feel that they are always responding to their competition. It’s a mantra that many of us have mistakenly picked up from the businesses of yesteryear, in a time period I like to call “The Tyranny of Betty Crocker” in which the only way to win was to be the decent product and the lowest price. betty-crocker-logoMarketing evangelist Seth Godin points to Betty Crocker as one of the most powerful brands, a brand that dominated the middle market, personified its identity and threw around money during the TV industrial complex, a time in which if your ad played on TV more, your sales went up. The consumers mass consumed messages and therefore mass consumed the products. But I see Betty Crocker in a very different light for a couple of reasons:

1. There will never be another Betty Crocker:

I think the telltale sign of a good marketing campaign is actually its vulnerability. A marketing campaign that is actually worth its weight in salt could be leveraged by anyone to disrupt the current category lead (which is why market leaders can never stop advertising). But with Betty Crocker the brand wasn’t built on a great campaign, it was built on first mover advantage. It plopped itself down in an empty parking space and refused to move.

2. No one wants a decent product:

Betty Crocker built its brand on being a decent product at a decent price; it’s entirely the definition of the middle market. I’m not trying to rag on Betty Crocker, but let’s face it, if you are buying their cake mix it’s likely for an occasion that’s not a big deal, or because you simply don’t know how to make your own cake! If it was an important occasion where you really cared about the quality of the cake it wouldn’t cost you $2.39 and come with a bag of sprinkles. While the 90’s was a time where we loved our middle shelf products, society has taken a dramatic shift in the demand for quality. Heck, we expect quality from McDonalds with “all white-meat” McNuggets and McCafe coffee. Now more than ever our society cares about quality over price.

3. Competing on price means you’ve got nothing else:

When you compete on price you are quite simply telling the market “Hey, I bring no other value to the table so I’m going to charge you less.” You’ve decided that your product isn’t better, you are not more convenient, your customer service is lacking and your brand is hollow. You’ve done your business an injustice and you now find yourself in a race to the bottom. This is the entrepreneurial equivalent of telling someone they have an ugly baby, and if you’re reading this and instantly thought “NO! My business is none of those things!” then your price better reflect it.

In short, don’t ever try and model yourself off of the baroness of cake as she is a relic of time gone by that can still stand because money buys visible shelf space.

I learned this lesson the hard way about 7 years ago when I decided to open up my own search engine optimization (SEO) practice. SEO is an industry riddled with competition, most of which is based out of Asia. They were sub-par in quality but could compete at a remarkably low price because it’s the kind of industry that Betty Crocker could have a field day in. But, being the young, naïve and overly ambitious kid that I was, I dove right in and took on the industry at their price point and selling on the point that working with me was easier as there was no language barrier. It was a hook that worked, I had an influx of clients each now paying $100/month for me to do their SEO – and it was horrible, I was drowning in the amount of work and my hourly made McDonalds look like an ideal gig.

I was stuck, I had more work than I could handle and yet not enough income to hire someone to deal with it and I shut down my practice after two-months and redirected my clients to other agencies. I realized the market had some specific needs, they loved the customer service I was able to provide and they came in droves to get it, even though I had not yet established a history of results (which in an industry as cut-throat as SEO is quite a surprise), but how could I possibly expect them to buy my services at the prices I needed them too? It wasn’t until an outing to Boston Pizza that I had my ‘ah-hah moment”.

boston-pizza-logoPizza is literally one of the highest markup products in the world, in fact so commonly marked up that there is a place in town right now that will give you a one topping large for $3.99 and they tell me they are still making a profit. Whereas if you walk into your local Boston Pizza to order a large pizza, you’ll find you’re a lot closer to $30 for a pizza. It was in that moment I realized that it was important for my business to be the Boston Pizza of SEO and not the Betty Crocker.

After about a month of planning, and examining various business models of premium brands, I re-launched my SEO practice this time charging just north of $1000/month, a ten times multiple of my competitors’ price and still I had droves of customers.

What I had stumbled into was a few core concepts to establishing a premium brand, and pricing a product:

1. The Law of One:

Pick one thing that your business will do better than anyone else; if you happen to do other things well that’s a bonus, but pick one aspect of your business that you will NEVER sacrifice anything for. For Boston Pizza it was hospitality, the friendly wait staff, clean modern décor, and the TVs visible from all around the restaurant instantly made you feel that you aren’t just here for a pizza, but here to share an experience. For my SEO practice it was customer service, each client had a free one-hour skype conference with me, where I would go over in great detail their site’s technical needs, their content strategy, and their specific goals for our campaign. My clients knew they were being heard, they were constantly updated along the way, and had my actual cellphone number so that they could reach me 24 hours a-day, but I did such a good job with the hand-holding along the way that they never felt the need to call, they could trust in my practice. They saw a new article on a developing SEO strategy and knew “It’s Ok! Adam’s taking care of that!”

2. Apples to Oranges:

You never want to be in a situation where you can be directly comparable to your competitor, the more you make your customer compare apples to oranges, the more you can stand out! Sure, you can walk down the street and get that $3.99 pepperoni pizza, but where else are you going to get a spicy pierogi pizza other than right here at Boston Pizza! As soon as you’ve removed yourself from the status quo you can focus on selling your product/service rather than comparing yourself to the competition. For my business this meant not charging a monthly flat fee. I would actually present all my clients with an hourly and require a minimum number of dedicated hours be purchased for each month. My final fee after taxes would work out to $1026.94, a number carefully selected to avoid the rounded figures of 5’s and 0’s that overpriced flat fees employ. Whenever my clients inquired about my pricing, the answer was simple. “We can’t directly compare the price you’re paying; with my competitors you are buying into a shared time model where someone will build out your campaign as well as their other clients at the same time to share costs – with my service you get 8 dedicated hours every month where a qualified SEO specialist focuses on your campaigns specific needs!”

3. If You Build it – They WILL Come:

People will pay for anything, yes absolutely anything. There is someone out there who WILL pay for a $500 sandwich, you just need to find them, and when you do it’s actually a lot easier to convince them to buy that $500 sandwich than it is to convince 500 people to buy a $1 sandwich. Sales take time – no matter how great your product is, you will go through the sales cycle on at least a basic level with every person, and at the end of the day it is always in your favor if that sales cycle is worth more.

The competitive fallacy is nothing short of a disease that leads to the death of far too many startups. Ignore your competition, focus on your strengths, and do them better than anyone else. Sell oranges when your competition sells apples, and don’t be afraid to charge for the value you bring to the table. Pricing isn’t about your costs, it’s about your customer’s perceived value and when you build a premium brand someone is willing to pay for it. So above all else, avoid a race to the bottom!

Author:

adamc-photoAdam Cochran

Advisor with Laurier’s Launchpad Program – with his background in human psychology, business development and technical systems Adam specializes in rapidly developing businesses in competitive sectors.

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