Competing Up or Down: Which Way to Go In Business?

in LeoFinance6 months ago

To me, there's often more art than science when it comes to operating a business.

The science mostly has to do with understanding the fundamentals. But it is the art that brings refinement through differentiation and innovation.

Competing up versus competing down are two different strategies that businesses can use to gain an advantage in a market.

What comes to mind when competing up? This is when businesses offer a higher quality, more sophisticated, or more innovative product or service.

While competing down is sort of the opposite, in that it means offering a simpler, cheaper, or more accessible product or service.

In terms of profits, the former is aiming at magnitude(unit profit) and the latter is aiming at scale(units sold).

The main reason why I love analogies is that they're a great way to explain a concept in a simple and understanding manner. So in this post, I'll explore this concept with the analogy of two restaurants in a busy street.

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Rivalry Across The Street

Two restaurants face each other on a busy street(not literally). Both of them serve Italian food, but they have different approaches to competing in the market.

One of them, let’s call it La Bella, is competing up. This one offers a high-end dining experience with exquisite dishes, coupled with elegant decor and professional service. This attracts customers who are looking for premium quality and sophistication.

The other one, let’s name it Pizza Express, is competing down. As the name suggest, it offers a fast and more casual dining experience, with simple furniture, self-service, and affordable dishes. Customers who are looking for convenience and accessibility are attracted to this place.

Although, they appeal to different segments of the market, La Bella has a higher profit margin per customer, but it also has higher costs and lower volume.

Where as, the other restaurant moves with a lower profit margin per customer, but it also has lower costs and higher volume.

Opportunities And Challenges With Each Strategy

La Bella’s main challenge is in maintaining its high standards and reputation, while also keeping up with the changing tastes and preferences of its customers. This can be hard, especially from a cost perspective, as it usually requires spending most of the profits back into the business.

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There's also a likely possibility of imitation from lower-end or other similar high-end restaurants.

However, the opportunity is in creating a memorable and distinct dining experience that can win over many loyal and repeat customers. Many customers are there for the experience and higher end restaurants can be good at creating great experiences given the atmosphere they project.

Pizza Express's main challenge is also maintenance. In that, can it maintain its low prices and high volume, especially when the economy is not doing well?

During those times, there's always the tendency to cut corners to maintain low prices and hight volume. But this always has a way of affecting quality and customer satisfaction.

Here too, imitation can happen both from higher end and similar restaurants. This seems unavoidable these days.

Strategically, I see the opportunity in growing a large customer base but turning a good ratio of that into repeat or loyal customers will be another challenge of its own. Perhaps, building a brand can help with that.

In Closing

Generally, I prefer competing up than competing down. Because the former is a better way to differentiate and stand out from the crowd.

However, if the goal is sustainability, then it might be harder to achieve from that route.

Staying ahead of the game may require a combination of both strategies at different situations or intervals. Meta(Facebook) seems to be good at that.

Thanks for reading!! Share your thoughts below on the comments.


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