Do "Competitors" BOTH Win When They Compete?

By: Chris Angeles
Submitted: 2007-01-17 11:49:56
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Well just last Monday, we had a guest speaker in my entrepreneurship class (only class I'm taking in Ateneo). Well he talked about some mumbo jumbo of his business at first, then at the end, we played this game. Well I wont disclose it, because those that may read it will have their own game ruined if ever you may play a game similar to this in the future.

Anyways, these principles I learned from the game may be applied in business... Lot may be confusing at first because I didn't explain the game, but just ride along with me..

Imagine 2 lemonade stands right next to each other, same taste, same marketing, same service, same everything.

The lemonade costs $1 each on both stands. lets say the cost to make a cup of lemonade, including the cup itself, the water, the labor, the space, and the lemonade mix is $0.20.

10 people arrive, out of those 10 people, 5 people go to lemonade stand A, and 5 people go to lemonade stand B. EACH lemonade stand makes $5 gross profit each, or $4 NET profit each ($1-$0.20 = $0.80 profit each cup), or a TOTAL NET PROFIT OF $8 from 10 people.

The next day, lemonade stand A then sees an opportunity that he can earn MORE business by being different from stand B. He then decides to lower his price to $0.90.

lemonade stand A = $0.90 lemonade stand B = $1.00

Well out of 10 people, everyone then goes to stand A because it is cheaper than B, having in mind everything else (service, taste, etc.) is the same. TOTAL gross profit is $9.00, or a TOTAL NET PROFIT OF $7 from 10 people.

Notice how the TOTAL NET PROFITS (from A and B) now are down from $8 when they were both $1 each, to $7 when A decided to lower down the price.

Well next day, stand B notices he isn't getting any customers, and then lowers his price down to $0.80 a cup.

lemonade stand A = $0.90 lemonade stand B = $0.80

Out of 10 people once again, everyone goes to B now, since his prices are lower. 10 cups equal $8.00 in sales, or $6 in NET PROFITS FROM BOTH STANDS.

Realize that the TOTAL NET PROFITS is now down to $6.

The story goes on and on, until the point where lemonade stand A has their prices at $0.40 each, and lemonade stand B has their prices at $0.30 each...

Then the next thing will happen is the lemonade stand A will lower down their price at $0.30 (the same price as stand B). Hehe, lets not use nickels and pennies in this example.

So now, both A and B have their prices at BOTH $0.30 each for a cup of lemonade.

lemonade stand A = $0.30 lemonade stand B = $0.30

10 people come once again, and for ONCE AGAIN, 5 people buy from A, and 5 people buy from B (since both stands have the same prices now). But what's different now is that they aren't making as much profits as they used to make. the TOTAL SALES is down to $3 only, and TOTAL NET PROFIT is down to $1 from 10 people...

Well if these two lemonade stands can bring back their prices back to $1 each for BOTH OF THEM, then they will be making more profits as a group, but because of competition, both of them lost. it was a lose-lose situation for both of them.

This reflects most of our market now. If you go to the mall to buy a cell phone (say for example in Greenhills), the prices are almost the same. I have a friend that told me that now, the profits of selling a cell phone is very low, only around 100 to 200 pesos for a phone that costs around 5,000 pesos, but way back before, profits were around 1,000 for a cell phone worth 6,000. Well obviously, everyone has now been lowering their price to compete with others, just like how the lemonade stands worked out.

Another example here in the Philippines is the prepaid cards. well the normal cards cost 300 pesos each (around $6), where you can load 300 pesos worth of calls and text messaging in your phone. Well dealers now get them at wholesale prices (maybe around 265 pesos if you buy around 500 pieces, I'm just guesstimating).

Well the cards are supposed to be sold at 300 pesos each, but look around, especially at the sari-sari stores, small cell phone stores, or people that distribute them at word of mouth. I bet you will RARELY find anyone that sells them for the REAL price of 300 pesos, most of them are within the 280 pesos range.

The only place I still see them for 300 pesos each are at the malls.

Well keeping the malls aside from now, if you owned a sari-sari store or a small shop, you think you can sell these cards at 300 pesos each? Even if you might sell a few here and then, you will be in no competition from those shops beside you that sell them for 280 pesos each.

If I found a sari sari store that sells it for 300, I will just simply go to the next one beside it and buy a card for 280. Its just that simple.

BUT imagine if ALL the prepaid cards (although can be purchased at wholesale at 265 pesos), are all sold at 300 pesos each, no matter where you look for it, you think every seller/dealer will benefit from it? An extra 20 pesos for each card sold, or actually more than TWICE THE PROFITS!

If they were ALL sold 300 pesos each, the demand WOULD STILL BE THE SAME. The same number of cards will still be sold.

Moving on, we can apply these principles and techniques in our OWN business lives, WITHOUT hurting our competition at all.

Well almost everything that's out in the market it priced almost the same. If you're looking for a specific cell phone in the mall, go around the mall and the prices are all about the same.

But what if you're selling something that's not in the market yet? Something that is unique. Something that cannot be found anywhere else?

Lets say for example I was able to think of and create a shoe with a built in secret camera on the toe part that can take pictures of ladies upskirts, (hahaha, sorry to the ladies reading this), then I would have a unique item that I believe isn't in the market, or at least one that I never heard of. (I promise I don't have something like this, or even tried looking for an item like this. hehehe).

There is a hungry market that would be so EAGER on purchasing this item, especially men. It probably only gonna cost me $60 to make something like that at wholesale bulk (around 100 pieces? or maybe around 500 pieces?, lol), but an item like this it WILL sell if I sold it for $120, or twice the price (people who really want it will buy it). if I sold it for $150, those same people that would buy it for $120 would still not mind buying it for $150. it would have somewhat almost the same demand and number of sales in the item whether I sold it for $120 or $150. It makes just minimal difference.

Hehe, I hope you guys learn a lot... a lot of the "good" insights!

Chris Angeles is a young entrepreneur, very young one at the age of 20. He learns more from experiences in the business world and making mistakes rather than from learning everything from school and entering the corporate world. Well he has been doing real estate lately, specifically investing in an apartment building. He DOES beleive in education, and attends several seminars, entrepreneurial groups, meetings, cashflow events, etc., and he reads a lot of books in personal development and entrepreneurship. Learn more about him and check his daily blog on his ventures at http://www.the-college-dropout.com.

Article source: Expert Articles