Wal-Mart’s and Costco’s tremendous success have led us to believe that everything we do and everything we buy are determined only by price. This commoditization of America has had a profound effect on our national psyche.
The product concept is why consumers buy. The product concept represents what determines demand from consumers. In many cases that demand is determined by far more than just price. Except for commodity markets, prices are just one factor in the overall decision making process by consumers. Failure to understand that principle has profound consequences on our employees and the stability of our economy.
During the past few years, Lending Tree’s commercials proudly proclaimed that "Bob" the borrower was all too happy to have "his bank" compete on his mortgage. Unfortunately, the logical consequence of such price-only marketing is to undermine the risks and the values of the product or service that the relationship banker has to offer his or her customers. I can only imagine a commercial today by a community banker assisting "Bob" when he finds out that his "price only" bank is now insolvent.
When lenders fail to understand the risks inherent in their own lending practices disaster is just around the corner. In the current mortgage crisis, I am afraid we have already gone around the corner and are just now beginning to realize what mess we, as a nation, have gotten ourselves into by failing to understand the inherent risks of the lending business. We focused on interest rates (prices) only and not on the risks of these subprime loans.
Until consumers understand that there is so much more to a product than just price in many markets, and until business leaders understand the inherent value in their products and services they provide, we are doomed to create a national culture of price only marketing with potentially disastrous consequences. When the consumer and the business leader do not understand the impact of a price only strategy, the economy is likely to encounter many failures and bankruptcies.
Only with bankruptcy as an option or severe market driven change will the price only model be proven wrong and the practice stopped. Remove the opportunity for failure with corporate bailouts and all we have done is institutionalize and perpetuate bad practices. These bad practices will hurt consumers and markets for years to come.
Wal-Mart has changed its marketing slogan from "Lower Prices Everyday" to "Save Money, Live Better". While this may appear to be a simple change, it reflects, in my mind, that Wal-Mart has recognized that it was boxing itself into a corner by emphasizing only price.
When Wal-Mart was much smaller in the 1970’s, price concerns were important but the company emphasized a much more wholesome marketing concept in which employees, suppliers, consumers and shareholders benefited.
As the microeconomic concept of the Wal-Mart model transformed itself, it became obvious to those who supplied the company that moving the Wal-Mart model from one of a balanced approach to a price only approach would eventually lead to disaster. The Wal-Mart model, before its most recent change, was a failed business model. First suppliers have or will fail, then employees lose benefits, and eventually even consumers lose. As Wal-Mart grew is size, what was true at a micro level begins to fall apart for the economy as a whole. The failure of the large term "price only" strategy for something that is not a commodity will virtually ensure substandard profitability in the long run with the result being a flight of capital from those companies.
Should government decide that corporate failure is not an option for companies that do not understand their own markets, such as with the automobile industry, one can only conclude that we will have effectively sealed our fate as a second rate nation doomed to mediocre growth, substandard opportunities for our citizens, and a denial of new products for all of us.
With cell phones, iPods, microcomputers came disruption for the companies that made products that were no longer competitive with these innovations. Thank God, buggy manufacturers did not ask for a bailout when automobiles were first introduced. Creative destruction provides opportunities, allows for transformation and an improved life for us all. Interfere with those markets or fail to understand them will be at your own peril.
The companies that understand the product concept of what they produce or services that they provide will survive in the long run by ensuring that the profit margins are large enough to allow shareholders, employees, management, and suppliers to survive and thrive in the long run. Consumers seeking only price will get what they pay for. Consumers demanding a value added service from the companies they buy from will be willing to pay the price because it will be worth it in a free market exchange between the buyer and seller. The wealth of our Nation and opportunities for our children require no less an understanding.
Frank Ryan, CPA specializes in corporate restructuring and lectures on ethics and economics for business leaders. He is on the boards of numerous publicly traded companies. He can be reached at [email protected]