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How to Safeguard Your Business’ Profit Margins

How to Safeguard Your Business’ Profit Margins
anoosh-kotak
Anoosh Kotak16 December 2023

Imagine stepping into the shoes of Priyanka, a small bakery owner in Bandra, Mumbai. It's the third quarter of 2020, the COVID-19 crisis has hit hard, and the bakery is feeling the heat. Competitors are slashing prices, and cash flow is becoming a significant concern. 

Her fears of losing to competition and changing market conditions seem to be manifesting right before her eyes. However, Priyanka had a different approach in mind. Instead of joining the race to the bottom with price cuts, she focused on enhancing the value she offered her customers.

Priyanka started introducing artisan bread and custom cakes and began holding weekend baking workshops, elevating her bakery from just a store to a community space. Her customers loved the new offerings and the chance to learn from a seasoned baker. Her bakery became more than just a place to buy bread—it became a place of experience, a place where people felt valued.

Fast forward to today, Priyanka's bakery stands strong even as many of her early competitors have closed their doors. 

According to a study by McKinsey & Company, this value-centric approach puts Priyanka on the right track. Businesses that focus solely on price tend to have lower business margins and are more likely to fail than those that focus on creating value for their customers. 

The study also found that businesses focusing on value creation are more likely to succeed and exceed gross profit margins by more than 26%, making their employees happier and simplifying their end-to-end operations1.

As a service provider, you have the power to differentiate yourself, much like Priyanka did, by delivering high-quality services that provide value to customers and investing in technology and innovation.

But, What Does ‘Race to the Bottom’ Mean?

The "race to the bottom" is when companies compete with each other by lowering prices, often at the expense of quality and employee well-being, to win market share. This approach can lead to a downward spiral where companies continually cut costs to remain competitive, degrading the standards and a race to the lowest possible price point.

This practice has been around for centuries, with roots in the industrialisation and globalisation of economies. 

How the Race to the Bottom Affects Service Businesses

How the Race to the Bottom Affects Service Businesses
  • Profitability: It is a classic tradeoff between market dominance and profit margins. Companies cannot reduce prices beyond certain thresholds and yet thrive. As companies lower their prices to remain competitive, their profit margins shrink which can result in companies barely breaking even or even operating at a loss.

  • Quality: When the focus area is greater output, companies may need to cut corners or deviate from SoPs to offer services quicker and at lower prices, causing a decline in the overall quality of the offered service.

  • Customer service: Have you ever visited a crowded restaurant at peak hour and felt the quality of the staff’s hospitality drop? With lower profit margins, companies may not invest in training and retaining skilled employees. The result? A decline in customer service leads to dissatisfied customers and negatively impacts the company's reputation.

The airline industry has many low-cost carriers offering lower prices at the expense of quality and customer service. One of the cheapest airline companies in the country- Go First, had upsetting customer service in terms of punctuality and maintenance. The cheaper flight tickets compromised on quality experience and slim margins have led the company to file for voluntary bankruptcy in May of 2023.

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