Losing the Race to the Bottom

I’ve been contemplating for a while whether the training industry is in a race to the bottom. This thought process has its origins in a discussion with a colleague who was considering investing in a new fitness franchise. The franchise had been established to run twenty-four hour fitness centers in competition with an existing chain. The obvious question that I asked was why someone would join your facility in preference to the preexisting chain. The answer provided by my colleague was that memberships would be at a lower cost than the existing chain and wouldn't lock the client into membership for a fixed period. That is, memberships could be canceled at any time.

My take on this was that this franchise had been established solely to engage in a race to the bottom with the existing chain. After all, what is there to stop the existing franchise from reducing their fee levels to those of the new franchise in order to stem the loss of clients or attract new clients? It seemed to me that the only point of competition was price. At times like this, I think of the writings of Dan Kennedy and his frequent hypothesis that you can only lose by winning a race to the bottom, particularly when you're competing on nothing but price. At some point in the race, the cost of acquiring and servicing new customers falls below the value (read fees) that the client provides, and the profitability of your business erodes. You begin to fall in love with volume of sales rather than the profitability of each sale. The portion of each sale that can be applied to the overhead of your business is reduced (an alternative way of looking at this is that you need more customers just to cover your costs). Even taking a lifetime view of the value of the customer can still leave the business owner with an unattractive business proposition. In addition, the business owner will also need to continually monitor sales levels and the activities of their competitors. While understanding what your competitors are doing is important is business, understanding and improving your own business are more important.

Fitness Race to the Bottom

This also got me thinking about a further race to the bottom that the fitness industry seems to be engaging in. The price of personal training sessions in my local area has begun to fall as more and more operators move into the market. I noted with interest the comment from Steve Pulcinella that there are facilities in his area offering free personal training.  I found this truly amazing. Does the facility factor this into their membership prices? What are they paying their trainers? How do they provide this added value to their customers at no apparent cost to their customers? Yet again, it seems that the only factor in which the industry likes or is seemingly able to complete is price. Again, it appears that we are in a race to the bottom.

So how do we get avoid this trap and continue to derive a reasonable income for our endeavors?

My simple plan for dealing with races to the bottom has three steps:

• Recognize when you are in or could become involved in a race to the bottom.
• Refuse to participate in a race to the bottom unless there is a significant advantage to be gained (last man standing).
• Identify an area in which you can compete and charge a premium to the market.

Recognizing that you are in a race to the bottom isn't as easy to do as it appears. Sometimes you respond to your competitors by simply doing something rather than offering a reasoned response. If you find yourself responding without thought and continuing to do so, you're perpetrating a race to the bottom. As soon as you recognize that you're doing this, you need to stop, think, and then act.

Think before you act. There is a reason that Napoleon Hill's opus on success was entitled “Think and Grow Rich” rather than “Blindly React and Grow Rich.” If your main competitor cuts prices, think long and hard before you cut yours. Is your competitor trying to steal your clients, or is he looking to operate in a different market than you because he can't compete with you in your chosen market? Is your competitor a true competitor, or is he merely offering a similar product or service? Can he steal your prime clients away from you? Is his target market demographic truly the same as yours? Answer these questions before determining what action, if any, you will take. You may be able to exploit the price gap that your competitor has generated by highlighting to the marketplace the value you provide that your competitor can't.

Fire Unwanted Clients

You may also use this as an opportunity to send some of your less desirable customers to your competitor. Ridding yourself of unwanted or unprofitable clients can reduce your own stress levels and potentially increase your profitability with fewer clients. If the 80/20 principle holds true, eighty percent of your profits will come from twenty percent of your customers. If this is true, focus on keeping the top twenty percent happy and consider what, if anything, you will do with the less desirable clients. In the same vein, eighty percent of your grief will likely come from twenty percent of your clients. The twenty percent group is the one you want to send to your competitor (maybe with a nice 'thank you' note for taking them off your hands). These clients are generally obvious—those who pay late or have insufficient funds in their account to cover your direct debit request, those who book sessions but then regularly cancel at the last minute or don’t turn up at all, and those who just need to be fired!

Will You be the Last?

You may, however, wish to participate in a race to the bottom if, and only if, you have the confidence and resources to be sure that you will be the last (wo)man standing at the end of it. In this scenario, you will have a larger customer base of customers for whom there isn't any alternative but to continue with you. You may well then have a window of opportunity to raise prices and boost profitability before new competitors begin to emerge. You should exploit this window to improve your service, products, marketing, and business operations to the extent that competitors will find it more difficult to enter the market. Build as many barriers to entry as you can for those who wish to compete and steal your prime customers.

Identifying a market in which you can compete and for which the market will pay a premium is really the key to your business. Identifying a niche and exploiting it has been the basis of successful businesses since commerce started. It is critical to remember, however, that you need both a unique niche in which to operate and a product or service that the market is prepared to pay a premium for. If you have only one of these two, you may well have a business, but you are almost guaranteeing yourself lots of stress. Your niche can be whatever you define it to be. The market will decide if it will pay a premium for it.

The one thing that never goes out of vogue in any successful business is results. If you make a valuable proposition to a customer, you had better deliver on it. If you can successfully help clients achieve their goals, whatever they may be, people will continue to utilize your products and services and will, if encouraged appropriately, direct other people to you. If you don’t deliver results, you can expect to be very lonely. It is your ability to generate results within your chosen niche that may well determine the premium the market is prepared to pay. As in all things, strive to be the best you can possibly be in your chosen area. If you plan to focus on helping clients lose weight, you'd better have a toolkit full of options and alternatives to ensure that your clients lose weight. If you want to focus on athletic preparation, you'd better understand it better than anything else and turn out athletes who are fully prepared for their sporting endeavors. Results are what people are seeking, and results are what you need to provide. Proven results also make it harder for would-be competitors to enter the market or to cherry pick your clients.

You can compete on price if you want to or will benefit from doing so, but don’t make it the only weapon in your arsenal. You must, as Dave Tate recently noted in an article, have a pricing strategy (preferably one that is ethical and legal), but think of other ways you can compete that don’t involve price to avoid races to the bottom where it's difficult to truly win.

Learn everything you can about how successful businesses operate and apply it to your own. Model success, learn from failure, identify and exploit your niche, and avoid races to the bottom.