(NOTE: This is a follow-up message to a series of emails I started almost two years ago that was inspired by a group of people in Bar Harbor, Maine who sell firewood to tourists in the summer. I’ve been meaning to finish it for a while, and well… I finally did. Here’s a link to a PDF with the previous messages to refresh your memory: The Camp Wood Saga)
Let’s say you live near a popular campground. To make a little extra money, you and all your neighbors sell firewood at the end of your driveways for $3 per bundle.
Then one day, your neighbor Alice lowers her price to $2.75 per bundle. And then the next day, your neighbor Bob lowers his price to $2.50 per bundle.
The race to zero has begun… what do you do?
If you join the race by lowering your price to $2.25 (or lower!) you’ll crush your profit margin and your personal camp wood empire will crumble.
But what are your options? Do you have any choice in the matter? Don’t customers always want the cheapest price?
Here are three approaches you could use to deal with the situation:
If you can differentiate your product in a way that is meaningful to your potential buyers, they will pay a premium for it. There are at least three ways to do this:
Messaging—You could take a placebo approach by orienting your marketing message (i.e., the sign at the end of your driveway) to appeal to a story in the head of your ideal buyer. These stories come in a variety of flavors:
Products—You could bundle in inexpensive products to support your value proposition:
Services—You could include free services like:
With a little more brainstorming, you could extend all three of these lists. Doing so would result in a dizzying array of potential combinations. One of these would almost surely be a winning offering.
The tricky part is figuring out which one is the right one, but you can do that through conversation with your existing clientele.
Let me start off by saying that I don’t like this option. I’m only including it to explain why I don’t like it.
If you lower your price to undercut your competitors, it’ll destroy your profit margin UNLESS you also lower your costs. So, in the short term you can maintain your profit margin by lowering your costs along with your price.
Why don’t I like it? Because cutting costs probably looks like sourcing cheap labor and cutting corners on quantity, quality, or both.
Plus, your competitors can probably cut costs in the same way, so this approach really just prolongs the inevitable collapse of the market.
You can’t cut your way to success. With camp wood or anything else. It’s a short term strategy that trends toward failure.
Assuming you have a reasonably good relationship with your neighbors, you could team up with them in a variety of ways. My recommended approach would be for you to handle all the marketing and innovation (i.e., the “brains” work) and your neighbors to supply the products and deliver the services (i.e., the “hands” work).
Since your neighbors have started a price war, it’s safe to say that they’re not savvy marketers. They might be perfectly happy to never have to deal with a bunch of annoying customers ever again, and instead just supply a steady stream of firewood and related supplies to one customer - you.
Since you’d be shouldering all the financial risk and decreasing their range of responsibilities, you could probably even get a bulk discount and still have a mutually beneficial arrangement. They get a predictable income stream with less hassle, while you increase your profits and potentially corner the market.
And so ends the camp wood saga.
I hope the folks who sell firewood at the end of their driveway in Bar Harbor, ME have inspired you to think a little bit about microeconomics, positioning, and profitability.
Even this exceedingly simple market example can teach you a lot about how to grow your business… even if it’s not selling firewood to campers.