The Race To The Bottom Has Already Started

Throughout the year, as we have seen the approaching recession and pressures on the economy, we have been talking to ourselves out loud that we must not go back to the tried and always failed methods of a race to the bottom on price.

Against a backdrop of rising material and labour costs, reduced consumer spending and cratering confidence, it would be a mistake to resort to regular undercutting and margin reductions in order to win business, no matter where in the supply chain you are.

It appears we have ignored our own advice.

A new race to the bottom

I can speak to this subject from a couple of angles. The first is my role in sales at our family installations business. Yesterday I lost two jobs to rivals who provided much cheaper quotes. I asked both clients if they could tell me how much cheaper the other quotes were. Both obliged and the margin by which they were cheaper were more than our entire profit margins on each contract.

These particular contracts were for fairly basic products. Composite doors and standard casement windows, nothing overly fancy. So unless the other companies can purchase their materials for less than half of what we can, which is likely impossible, it means they are throwing away large parts of their own margins in order to win the business.

As it is, despite the above, we’re due to have our best week of the year next week with a number of very high-value contracts already signed up. So the material value of those two particular contracts isn’t that significant. What it does point to, however, is increasing desperation, at least in our local area, from companies who are going back to the very lazy and risky strategy of selling based on price rather than anything else. In a time where material costs are still rising, when labour costs are rising, when demand is slowing and the cost of energy is hitting everyone, to start cutting away your precious margins is disastrous.

Undercutting is a very shortsighted tactic to win business. It’s not profitable business and when done over the long term often ends up in the business falling into financial distress. Whilst there is a particularly pertinent argument at the moment to keep prices as low as possible, especially for end users, it should not come at the expense of the business. A company has to be there for the long term to be able to honour its guarantees, carry out remedial work and hopefully sell more to its satisfied customers. You’re not going to be able to do that by cutting margins. The very lifeblood of any business.

Marketing emails focused on price

Around the start of this year, we saw a major return to marketing emails from suppliers. Throughout 2020 and 2021 the industry stopped taking on new clients at manufacturing levels. The sector was booming to a point where suppliers could not take on any new clients. Therefore the marketing push to attract new clients stopped.

Then the economic environment changed at the start of this year and the marketing emails returned when it became clear that there was a major slowdown in progress. The main focus of these marketing emails has been price and lead times. You’ll remember that lead times were a particular problem during the height of the boom, where standard products were taking months rather than weeks to be made and delivered.

Price has since become the sole USP of the majority of emails that I see land in our inbox. Whether it’s aluminium bi-folds, standard casement windows, flush windows, or composite doors, companies are selling their wares based on knock-down prices. It’s a tempting argument to make, in a world where prices keep going up, it’s low-hanging fruit to attract new business with artificially low prices.

It’s not a sustainable approach, however, and even less so when the economy is so unstable and the chances of a long recession are pretty much nailed on. As I wrote about the other day, the more profitable and sustainable approach lies with higher quality products. Whilst some may baulk at the idea of selling more expensive products when inflation is rampant, the fact of the matter is that higher-end products command far better profit margins and do not fit into the “stack ’em high, sell ’em cheap” business model.

Stupidly, I believed that after the last two years that perhaps the industry would learn from its?previous errors?in previous decades that a race to the bottom on price only ends in one result. That after being able to do very profitable business after a very tough pandemic it may have taught the White Gold parts of our industry that there was a better way to do business. It appears that faith has been misplaced and that the industry is doomed to repeat the same mistakes over and over again. Thankfully, there are some parts of the sector that does fully believe in selling on quality first. Those companies will find longevity easier to come by, profit easier to make, and by default swallow up more market share as the coming recession kills off some of the deadwood.