Sunday, December 22, 2013

Free Market

In a free market system, businesses , as long as they are acting within the law, can do things pretty much as they see fit.  The free market system stimulates efficiency, good service, and low prices.  Competition keeps things in check and basically ensures that good value is provided by participating businesses.  Businesses that provide better value, see more customers.  But customers are not limitless, not in any industry and certainly not in paintball.

When a business provides better value (often achieve by lowering prices), that business will most likely see an increase in customers.  That increase can come from two sources.  It can be an increase in numbers of people who would normally not be customers of that type of business(or are normally not customers as often)  and it can be an increase from customers  taken from a competitor who is thought not to provide as great a value.

When a business makes changes to increase the value they are providing to their customers, and some of that gain in business comes from their competitors, those competitors then have a choice.  They can either not do anything and allow their customer numbers to decrease, or they can make changes to improve value in hopes of regaining those lost customers.  The point here is that businesses do not work in a vacuum.  If a business makes changes that affect another business (competitor), there is a very good chance that competitor will react, sometimes right away, sometimes later.

So when making changes, especially changes in pricing, always ask yourself, “How will my competitors react to this change?  Will they ignore it and let me do as I please, or will they feel forced to make changes to counteract what we have done?”  If your choice is to increase value for your customers by reducing  prices, and your competitor feels obligated to do likewise, you should anticipate this beforehand and make sure you can afford to do this.  Because in the end, if you and all of your competitors have lowered your prices, unless this stimulates enough increase in customers from outside the industry, you will all end up with less profit (or more loss).

When we first started our business many years ago, we were met with a price decrease by our competitors.  I guess they were trying to scare us out of the market before we got well established.  We met them with an equal price decrease.  Eventually, our competitors realized that all this was accomplishing was reducing everyone’s profit.  Years later, one of our competitors changed their pricing structure quite radically, but it meant that the overall price for their customers was lower than our overall price and the perceived value to their customers was even higher.  When they did this, this time around we ignored them for a number of years.  We knew that if we matched what they were doing, it would mean less money for all of us.  The difference in pricing structures partially confused customers, but in the end, the overall lower price the competitor was charging made a dent in our sales, which meant that we had to re-evaluate the situation.  Do we continue to ignore the changes our competitor made or do we react with changes of our own?  At this point we felt we had no option but to react, which we did by doing something similar.  We changed our pricing structure to differentiate ourselves from our competitors. 

We changed things around so that a customer that shot a fairly low number of paintballs, would pay less at our field, while those that shot higher volumes of paintballs would save money at the competitor’s field.  We would have preferred not to be forced to make these changes, because we know that in the end it will result in everyone making less profit (or higher losses), but we felt we had no choice.   This is how the free market system works.  When a business makes changes, competitors may react, and often feel they have no choice but to react.  So always ask yourself when making any changes to your business, “How will my competitors react to this change and can I afford to have them react in such a way?"