How Competitive Convergence Kills Profits

By: Steve Coughran, CPA

Coughran Consulting, Inc.

Any business owner knows that in order to make money and ultimately be a success, you have to compete with other businesses. Whether you are a start-up landscape company competing with a more established firm or Valley Crest competing with Brickman, you always have to have one eye on what the competition is doing.

Unfortunately, many business owners take this idea to mean that they should always be competing to be the absolute best in their category. This is human nature, and from one perspective it certainly makes sense. If a business can offer the very best product or service, then it will make more money and the company will “win.” But this strategy is actually not the best way to succeed.

When many companies (or even just two) are competing to be the best, they will eventually fall into the trap of competitive convergence. Let’s consider a car example. If one company decides to one-up its rivals by adding a new feature like heated seats and a DVD player, it may gain a competitive advantage, but only temporarily. Very quickly, its competition will catch on and start offering the same features, putting the industry back on equal footing, only now with the added production costs of the new features. As a result, the first company will lose its uniqueness and competitive edge, reverting back to where it started.

When this type of competitive convergence gets out of hand, even the customer loses. Consumer goods that were sufficient in the past are overloaded with more and more new features, making them overly complex and expensive. Consequently, production costs go up as competitive pricing pushes profit margins down. In the end competitive convergence may feel like a race up a mountain when it is really a race to the bottom. This type of competition can drive a company into bankruptcy.

This failing strategy is exactly why it is important to take a step back and think about what competition and success really mean for your business. Rather than struggling to be the best in your industry, you should aim to offer something that no one else can. Then build a customer base using your unique offerings.

Consider the strategy of Southwest Airlines. No one would argue that they are the very best airline with the most luxurious planes, however they do offer free baggage checking, upbeat customer service, and the opportunity for passengers to choose their own seats. Southwest has attracted loyal fans with these unique offerings, not by continually adding new, more expensive features but through the implementation of a solid competitive strategy.

It is important for all companies to keep this strategy in mind. Competition is good for business, but success is not derived from a “win-all” strategy. Competition is about profits, not market share. If you offer something that no one else can, you can charge more, make more money, and win without falling into the trap of competitive convergence.