I was driving by a street corner when I saw the above girl holding her sign for Sonic. It made me think of the below thoughts.
HERE WE GO AGAIN
The airlines did it. Now the fast food industry is following suit. Price wars are about to kill the profitability of another industry. It all started with Wendy’s offering their dollar menu. McDonald’s was right in behind them and then posted their first quarter with a loss in 30 years. You heard me right, 30 years.
So now Sonic has to go and up the ante and offer burgers, not for 99 cents, but only 69 cents. This means even less profit for businesses. Don’t get me wrong. An inexpensive burger is good for my wallet. It is just not good for the long term health of business.
I don’t understand the thoughts of todays business owner. Why would you want to be the low price leader? Think of all the problems associated with that.
1. Tight profit margins means one bad slip and it’s a cracked-open head. One bad law suit, one bad quarter, one economic turn down, and bam! Your company has cancer (or dies). Higher profit margins means lower margin for error.
2. Smaller profit means less available budget to attract new/more customers. Less investment in new customer equals less new customers,which equals stalled growth.
3. Less gross income means harder recovery. If an issue arises, then there is less money to deal with it. Your prices went down, but most likely your cost of goods sold does not.
4. History shows the low price leader always loses in the long run. Example: Walmart is currently the low price leader. Before them it was Kmart. Before Kmart it was Sears. Before Sears it was JC Penny. Before JC Penny it was Woolworth’s. History shows how hard it is to hold the position of “low price leader” for a long period of time. Ultimately, the company will get to a point where it can no longer sustain itself and has to change it’s strategy. Sears switched focus to quality, Kmart is still struggling but has found success with celebrity endorsements, JC Penny’s new focus is fashion, Woolworth’s is now out of business.
I see this low price leader mentality everywhere I go. I have worked for many companies that have wanted to take that position. I fight it hard. In every case, so far, they fight right back and then agree with me once it is too late and their company is either in super hot water or dead.
Take a word from the wise. Find a way to charge high prices.