The Best of Pst (Dr.) Emmanuel Sunny Ojeagbase – Why Businesses Fail

HOW many businesses have failed because their owners engaged competitors in internecine war? We shall never know. But I have witnessed quite a few such wars of attrition. And l can tell you that it’s usually messy, with no winner and no vanquished.

One of the things that spark off the war that kills businesses of all sizes that are foolish enough to engage in it is when they choose to compete on price.

What is a price war? In the marketplace, products and services are categorized by their kinds. Take toothpaste for example. You have many types of this product that bear different names. But they all do the same thing basically: wash your teeth.

Having varieties of a product that does the same thing usually doesn’t cause a price war. Branding or product differentiation does a good job of preventing that conflict. But when you have a product that does the same thing and one of the people marketing it decides to lower the price in order to undercut other sellers of the same product, what ensues is a price war.

For example, if you are selling a certain brand of rice for say, N7,500 per bag and another person selling the same brand of rice decides to offer his own for N7,000; obviously, anyone who wants to buy that brand of rice will go for the one selling at a lower price.

In order to respond to the price that has been lowered, the first marketer will also decide to drop his own price to say N6,750.

The question you need to ask here is why are they able to do this? Simple, they are giving away part of what should be their surplus [note: NOT profit!] margin. Surplus margin is what you realize after you deduct the cost of buying the item from what you sell it.

It is out of the surplus margin that you will then remove your overhead cost, which normally includes what you pay as rent for your shop, the electricity bill, staff salary, etc. What is left after you have deducted these costs from your surplus margin is what you call profit margin which would then be BEFORE or AFTER-tax, depending on which of the two comes first.

So, when marketers start to lower prices so as to enjoy a bigger share of the market, what they are doing in effect is to erode their means of staying profitable.

 

Another obnoxious reason that lure companies to brinkmanship that eventually lead to the demise of their businesses is, when they engage in unhealthy rivalry for the share of the market.

 

I do not have all the inside information, but l strongly believe that the ‘dog eat dog war‘ that Berec Batteries and Ever Ready Batteries, both manufactured locally, engaged themselves in years back, contributed in no small measure to their demise.

You may not easily remember the ‘roforofo’ fight that these battery manufacturing companies fought on the pages of newspapers because that epic battle took place several years ago. The newspapers that ran their ads made tidy profits, I’m sure, as these companies went after each other’s jugular.

In the end, neither of the two companies survived. When the imported batteries from China, the Tiger brand is one of them, entered the market, there was little fire left in these companies to face the threat from abroad.

Our own company’s involvement in a kind of roforofo fight with other soft-sell publishers is unforgettable. I wonder if the Nigerian public still remembers the episode. Towards the end of the 80s, a rash of general interest publications hit the Nigerian market, inspired by the prodigiously successful weekly, Prime People.

In order to have a bigger share of the market, soft-sell publishers went into a very dangerous game of discrediting one another. When one title comes out with a story, another title that feels threatened by the perceived acceptance of the other title, would approach the subject of the magazine’s story and ask a very simple question like, ‘We read your interview in so and so magazine. Is it true?”

Of course, you know what the answer to that question will be, especially if the story had not portrayed this individual in a good light.

And, boom, that rival magazine has a lead story for its next edition; which will scream something like: “Socialite ABC To Sue XYZ magazine for N50bn.” Okay, the N50bn bit is an exaggeration because “billions” wasn’t bandied about back in the late eighties as it is in Nigeria today. But you get the point.

This dangerous game continued for a long time until the readers started developing resistance to soft sell magazines, which a columnist on the editorial board of The Guardian gave its kind of journalism an unflattering name, Junk Journalism.

It wasn’t long after this when the sales of all these magazines started to nose dive because they now lacked credibility and, eventually all of them, I mean all of them without exception, died unnaturally, one after the other. Not a single one of the soft sell magazines of that era survived. What a waste of resources all in the name of an unbridled fight for the share of the market!

Next time you want to start a price war or try to dominate a market, deploying a ‘pull-them-down strategy‘, remember that it takes two to tango. And your inordinate ambition can ruin not just your own business but also lead to the extermination of an entire industry as it happened to the soft-sell industry, of which our own Climax magazine was one.

 

First published in October 2012.