Price and Mutually Assured Destruction

During the Cold War, the United States and the Soviet Union both built massive nuclear arsenals. Both built nuclear missiles, both armed them with warheads, and both aimed them at the other’s major cities.

The idea was that if one side should attack, the other side would respond in kind. There would be no winner. Both sides would be destroyed. The reason to build up the arsenal was to ensure that the other side would be destroyed. It was mutually assured destruction.

This is what competing on price is for the sales organizations; it’s mutually assured destruction. There are more than two competitors, but there are plenty of sales organizations engaging in this exercise.

• You’re competing for a deal. Your competitor proposes a lower price. So you lower your price to win.
• In the next engagement, you know your competitor will propose a lower price, so you preemptively offer a slightly lower price than before. Then your competitor lowers theirs. This time they win and you lose.
• None of this is a secret. A third competitor competing against you for an opportunity, knowing that you’ve beaten them in the last two opportunities with your lower price, decides to lower their price.
• It’s an arms race. Off we go, chasing the bottom, everyone’s margins declining. No one has the profit necessary to execute on their client’s biggest or strategic initiatives. Soon, the industry is commoditized, no one can differentiate their offerings, and margins decline even further.

The only way to win this battle is to not fight it. Selling lowest price is building nuclear missiles at the fastest rate possible. Your effort to beat your competitors for deals on price results in you defeating yourself. Your time, your money, and your energy, all need to be devoted to creating as much value as possible so that you can claim some portion as profit, better serve your clients, and grow to even greater heights of value creation.

The Soviet Union bankrupted their economy. In part it was due to their command economy. In part it was due to their attempts to win an arms race. Competing on price is mutually assured destruction.

Questions

When is it okay to compete on price? When is it not okay?

Is your company’s primary value creation lowest price? Is it your business model?

How low will you go before you give up and let your competitor win?

What would happen if you went the other direction and tried to create and capture more value? What if you really tried to be better?