May
31
2018

Someone Always Bids A Dollar

By Chris 0

I didn’t watch much TV growing up. But when I stayed with my grandmother, we never missed The Price Is Right.

 

The game hasn’t evolved much since the 1980s: four randomly-selected contestants guess at the value of prizes displayed on the stage. The closest guess–without going over the actual price–is the winner. The winner gets to run up onto the stage to the sound of ringing bells and flashing lights and all the “DUN-dun-dun-DUNNNN!” music.

When a contestant has no idea what to guess, they say “One dollar!” and hope that everyone else overbids, giving them a win by attrition. And sometimes it actually works–at least on TV.

 

The “one dollar” bid puts them onto the stage and gives them a chance to win the real prizes: hot tubs, sea-doos and cars from Barker’s Beauties. They probably don’t call them Beauties anymore.

 

Many entrepreneurs follow the same strategy: instead of determining the actual value, they bid low and hope everyone else goes out of business. I mean—it works on TV, right?

 

But in real life, it doesn’t work. Not in the service industry, and usually not in the product industry. Because someone will always bid seventy-five cents.

 

Bo Burlingame originally wrote “Small Giants: Companies That Choose to Be Great Instead of Big” in 2006. He traveled around and met these “small giants” and wrote about their staff culture, client affinity and profit. One of the “small giants” is Zingerman’s Coffee, which I actually visited with Doug Chapman a couple of times, and who produced the original #CEO blend of coffee. Burlingame is right: they’re great. But they’re not great because of the culture or retention.

 

In 2016, Burlingame released a “Tenth Anniversary” edition of the book, and it contained an addendum: three of the companies he originally included had hit severe financial trouble, and one had gone bankrupt. The chapter–over an hour long on audiobook–sounded like an apology.

 

In all three cases, the “small giant” made a decision to sacrifice their price in order to gain volume. Burlingham interviewed the former Chairman of RPM, the largest of the “giants”, to understand why. RPM had decided to enter the Asian market with their product even though they knew they’d have to sacrifice their profit margin to compete. They quickly learned that someone was always willing to do it for less.

 

“He now knew the long-term consequences of that fateful decision in 1997,” wrote Burlingame. “Including the devastation of the culture he’d spent most of his life building.”

 

“He said, ‘We made concessions on price to get volume…then we got the volume.” RPM had to invest in equipment to meet the sudden uptick in volume. That put the company in a bad position.

 

“They had gone from coping with volume to NEEDING volume,” Burlingham wrote. “Sales volatility became impossible to avoid. All the competitor had to do was copy [RPM’s] original design and sell it for less, and Poof! all the sales would disappear.”

 

The big uptick in volume meant that RPM’s energy and capital was spent building capacity. But when the sales went away, they were out of money. They cut their prices more, and saw increased volume at even smaller margins; and then it all went away, because someone was always willing to do it for less.

 

How many times does this have to play out in a CrossFit gym before we, the collective who are building the brand, learn our lesson from it?

 

20 new clients come in. The gym owner can’t possibly talk to each individually about their goals and map out an individualized plan, so they’re grouped together. They herd up on the first class, and stay in the herd after six weeks or eight weeks…right out the back door.

 

Meanwhile, the gym owner has added capacity: they’ve hired a coach or bought more barbells. Now, without the 20 new members, he’s desperate to cover these new bills. So he does it again, but this time the athletes are even less likely to stay. Do you see the downward spiral?

 

In RPM’s case, the employees who praised the company leadership in 1997 were now out of work. The founders mostly said “we knew better, but did it anyway.” Instead of sticking with their value, they bid a dollar. And won–until they got onto the stage to play the real game.

 

No one who stands in line for The Price is Right is there to win dish soap.

 

No one’s life is going to change because they saved $20 per month on their squatting.

 

And you’re never going to win by being the cheapest gym. Someone else is willing to starve longer than you are.

 

Here’s a thought experiment: what would a gym have to do to justify a $200-per-month rate in your town?

 

Now, an action experiment: do that thing.

 

Go for the motor home. Don’t pray that everyone else goes away.

 

 

 

 

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