Business Question - competing on price

[Snidely Whiplash]

Curious how some of the business people here may have handled competition that was able to operate at lower price points? Maybe there is a business owners forum I dont know about?

I have a business idea (sale of a commodity) that I believe I can be profitable and successful with that has one single retailer in my nearby area.
The issue is that this particular retailer has 5 other locations in the state and I know I can operate profitably at a lower price point but I couldn't operate at a loss for an extended period of time, which I assume the current business can do by relying on income and profits from the other locations if they were to decide to undercut me drastically on pricing (subsidizing the loss at one location with profits from the others).

Is there an answer to be competitive in this scenario?
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[Aerides]

It all depends, of course, on what you are selling, and your supply/demand.

If you can differentiate on service, quality, support, location, convenience, speed, packaging, warranty, or with far less overhead, etc., explore that. If the products are interchangeable, and none of that matters, then you'll have a harder time of it. You need a way to say "mine's different/better", to charge more, even if the actual product is pretty much the same.

 

[Texas Proud]

What are some of the barriers for entry?


How much will it cost to get you up and running?


How are you going to attract customers? IOW, if they are the only game in town everybody knows them and will not move easily...


Why do you think they would undercut you? Probably all they need to do is match you and wait you out...

 

[REWahoo]

Is there an answer to be competitive in this scenario?

I'll give you the same response our sales people gave us when they wanted us to cut prices to cost or below - make it up on volume.

 

[marko]

My company's product sold for 50% to 75% higher than the competition and often didn't perform as well either.

Yet we held 85% of a global market share (and 100% of the US) for over 25 years.

How? Unbelievable, no-questions-asked customer service. It's the same reason people pay a premium to go to Land's End or Tiffany's.

True, we were the first to market and got a head start, created a heavy installed base and our service department was a 'whatever it takes' outfit.

If you're coming in late to the game, price may be your only answer but I'd look for your own unique competencies that would make you stand out.

You don't want them to be buying the commodity...you want them buying YOU.

 

[Snidely Whiplash]

If the products are interchangeable, and none of that matters, then you'll have a harder time of it. You need a way to say "mine's different/better", to charge more, even if the actual product is pretty much the same.

What are some of the barriers for entry?
How much will it cost to get you up and running?
How are you going to attract customers? IOW, if they are the only game in town everybody knows them and will not move easily...
Why do you think they would undercut you? Probably all they need to do is match you and wait you out...

I'll give you the same response our sales people gave us when they wanted us to cut prices to cost or below - make it up on volume.

My company's product sold for 50% to 75% higher than the competition and often didn't perform as well either.
Yet we held 85% of a global market share (and 100% of the US) for over 25 years.
How? Unbelievable, no-questions-asked customer service. It's the same reason people pay a premium to go to Land's End or Tiffany's.
True, we were the first to market and got a head start, created a heavy installed base and our service department was a 'whatever it takes' outfit.
If you're coming in late to the game, price may be your only answer but I'd look for your own unique competencies that would make you stand out.
You don't want them to be buying the commodity...you want them buying YOU.

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I should have stated upfront the business rather than being coy about it; retail propane delivery.

Local company has "branches" in several other areas of the state. High initial cost to get started for the business. Competition has a less than stellar reputation and their gross profit per gallon is VERY high. I know I could be very profitable with much less spread (I've seen comparable P/L's). Not sure how to differentiate solely on service.
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[Sunset]

.....

How? Unbelievable, no-questions-asked customer service. It's the same reason people pay a premium to go to Land's End or Tiffany's.

....

You don't want them to be buying the commodity...you want them buying YOU.

Exactly.
Once I sold a modem to a person, anyone can sell a modem, but most just would ship it to the person, why didn't he buy it cheaper from someone else ?

I included installation for free at their home, to be installed during the downtime between satellites flying overhead.

 

[youbet]

.

I should have stated upfront the business rather than being coy about it; retail propane delivery.

Local company has "branches" in several other areas of the state. High initial cost to get started for the business. Competition has a less than stellar reputation and their gross profit per gallon is VERY high. I know I could be very profitable with much less spread (I've seen comparable P/L's). Not sure how to differentiate solely on service.
.

Bulk propane? Will you be sourcing from the same place and paying the same amount as your competitor? Will you be able to offer solid assurance of delivery despite your truck breaking down, you getting sick or injured or similar that the larger competitor can offer? You can be assured that the competitor will be telling customers who want to switch to you that they'll be dropping off his "preferred customer" list. A scary thought to an elderly couple living in the boonies in January after a heavy, road-closing snowfall and a near empty propane tank.

 

[OldShooter]

... Maybe there is a business owners forum I dont know about? ...

Better, there is free business mentoring available via score.org. Most of us have BTDT in our own businesses, the rest of the mentors are usually former executives or sometimes professionals like CPAs.

The short answer, as you obviously know, is that competing on price is not fun and not usually successful.

For a starting point, check with nearby libraries who might be able to help you free access to comparable financials from the RMA (https://www.rmahq.org/StudiesSearch.aspx?topic=&srchtext=lp) database.

 

[COcheesehead]

A true commodity product it seems. You are going to have to find some other way to add value. Customer Service comes after the sale usually. You'll need to add something else of value, your value proposition, to motivate a prospect. Maybe like Hank Hill you can also sell propane accessories.

 

[samclem]

.
Competition has a less than stellar reputation and their gross profit per gallon is VERY high. I know I could be very profitable with much less spread (I've seen comparable P/L's). Not sure how to differentiate solely on service.
.

I wonder how "sticky" propane customers are? My guess is that they get used to buying from a company that has given them good service, and when they run low they call the number that is on their tank. Inducing them to check for a new supplier would involve contacting them and letting them know you can do something better/cheaper, etc, then motivating them to actually act. Also, don't most of these companies offer a lot more than propane (e.g. tank rental/loan, which locks a customer into buying from them)?

If the customers are "sticky" and there are ways to strap them to your service (e.g. tank loan/lease), that makes your entry harder, but also makes it easier for you to eventually become profitable (by using the same techniques and increasng your margins, once you have a customer base).

 

[OldShooter]

I wonder how "sticky" propane customers are? ...

This concept is called "switching cost." IOW, are the customers' switching costs high or low and, if high, is there some way a new player could mitigate the cost? https://en.wikipedia.org/wiki/Switching_barriers

Switching cost is not just money. It is things like hassle, risk, downtime, etc. This is why the cable companies can get by with lousy customer service. No matter show badly customers are treated, the prospect of changing out cable boxes, wiring, etc. is very unattractive. This is also why the cable companies offer deep first-year deals on service. The $ savings in the deal compensate the customer for the hassle of switching and, in a year, the prospect of switching again causes the customer to pay the higher rate.

 

[joeea]

I should have stated upfront the business rather than being coy about it; retail propane delivery.

Competition has a less than stellar reputation...

For this sort of business, you must compete on price. But you must compete on service as well. You may be able to capitalize on reputation and initial low price enough that customers who switch won't switch back. (In many locales the vendor owns the tanks, so switching costs can be high.)

In my association, we get propane delivered from a company that doesn't always have the best price.

They give us a discount when we purchase extra gallons ahead of the winter season (however many gallons we pay for in July, we get $0.10/gal off) and we get an additional discount for being in an over-55 community.

But the thing that really keeps us coming back is the service. Many get worried when the snow falls that their propane will run out. But our vendor always makes sure to keep their tanks from going empty. And they are always pleasant.

Every year at our annual meeting, we talk about other vendors, but never switch.

 

[OldShooter]

A question not yet asked and the one I should have asked first:

Why propane? It's a commodity, so you won't have much pricing power. There will also be a significant investment to get started; trucks, terminal, tanks, inventory, some office build-out probably. WAG $200K? And if the deal doesn't work out, much of that cost will not be recoverable. Maybe the reason that the incumbent has a monopoly is that everyone else that has looked at competing has decided that the reward/risk equation is unattractive. Or maybe he had competition that went under.

I would look for a business that didn't involve as much risk and one that wasn't so price competitive.

 

[Snidely Whiplash]

Just wanted to thank everyone that took the time to post a response. Some excellent points were made and I'm appreciative of the help provided. This is something that I'll probably be looking at seriously over the next 9-15 months so I still have some time to give it more thought.

I think the consensus is that an additional value-added component (service) is pretty important so I'll have to give some thought to how to best provide that. Complaints against the current provider focus on price and service so a focus on both of those might be an opening. I've seen the P&L's for several propane distributors (albeit in different geographical areas) and I know there is significant profit to be made at even half the margin the current distributor is charging.

 

[kcowan]

We are on propane in Mexico for heating, drying and cooking (stove and BBQ). I would say to offer regular fillups before you run out (based on usage pattern), emergency response in 8 hours in case of extra demand/guests, propane bottles refilled in 24 hours.

Price should be competitive but not necessarily the lowest.