Knowing Your Competitive Advantage

This article was originally featured in Fast Company. ‍

If you haven’t looked at what you’re paying for streaming services lately, you might be surprised to find that every service you are subscribed to has gone up exponentially in the past two years. It’s a microcosm worth studying in business as you work to avoid commoditization and grow margins to fuel growth.

Wait a minute—raise prices in the midst of an inflationary environment characterized by muddle-through growth? I’d argue that a company’s ability to increase its pricing power in today’s economy is essential to the strategy of putting an “economic moat” around your business, as Warren Buffet says—a key point of competitive advantage and the best way to avoid commoditization.

USE THE AERIAL COVER OF HIGH INFLATION TO RAISE PRICES

Sticky inflation like we’ve seen over the past couple of years brings higher input costs and shrinking margins, threatening your profitability and future growth trajectory. Instead, you can pass your higher input costs on to customers in the form of a price increase, protecting your margins and elevating the value of your company.

SUSTAINABLE PRICING POWER

In my work advising business owners and entrepreneurs, I’m around private equity investors a lot. The number one question they are asking today is very different compared to what they asked in the years of abundant and cheap capital when interest rates were at rock bottom levels.

Then it was, “How much money can you borrow to scale through acquisition?”

Now it is, ” How often you have raised prices, and how has it impacted your customer base?”

If you have been able to raise prices frequently without losing many customers, you are deemed to have sustainable pricing power, meriting a higher valuation because you have a clear competitive advantage.

BECOME PREDATOR, NOT PREY

Competitive advantage is not what you think your company is good at—it is what your customers value. Management guru Peter Drucker famously said: “Ninety percent of the information used in organizations is internally focused, and only ten percent is about the outside environment. This is exactly backwards.”

Survey your customers to understand their top buying criteria relative to their alternatives. Invest in your unique differentiators to avoid customers buying your product or service based solely on price. As I’ve said before, if you listen to your clients, they’ll tell you exactly how to run your business.

Bouts of high inflation often precipitate eventual economic downturns. Companies that have invested in their competitive advantage and raised prices to protect margins can become predators, not prey, during periods of weaker economic growth.

It used to be that during the initial stages of a recession, companies would lay people off in droves, hiring them back when the economy recovered. Today, people are the scarcest and most precious of resources. Smart companies that have raised prices in advance to offset a rise in payroll are positioned to steal a march on the competition when the economy recovers by being ready to go.

AN EXAMPLE FROM MY OWN EXPERIENCE

I work in wealth management, working in particular with first-generation wealth creators.  Over the years, we have learned from business owners and entrepreneurs that they value our services beyond the technical nuts and bolts of financial planning and investment management. Those increasingly commoditized services are now viewed by them as table stakes.

Instead, they value counsel on the more intangible questions around what the wealth they have created is for—and how to build a resilient family so that it transitions successfully to future generations. Our emphasis on helping them define and realize their legacy, separating the business of the family from the family business, and preparing future generations by seeing the world through their eyes, are priceless keys to our competitive advantage.  

DON’T BE AFRAID TO RAISE PRICES

You, like many other business owners, may be reluctant to contemplate raising prices in such a competitive economy for fear of losing market share. It doesn’t immediately feel intuitive. Your sales force may push back as well, as a price increase is not exactly what they’re looking for as they seek to hit their goals.

Let me offer some reassurance. Flash forward a few months in, and the reaction is almost always: “What took us so long?” Those customers who decide to leave are likely treating you as a commodity, crowding out room for “stickier” and more profitable customers who value what you do more. Those you lose are also more likely to be “problem” customers, and weeding them out may result in a short-term revenue blip. Over time, both profitability and morale improve. No longer are you in a transactional relationship with your client—you are valued for your true advantage.

You will also realize in the long run just how pernicious discounting can be as a tactic to increase volumes—one that almost always results in the devaluing of your business and the commoditization of your product or service.

PRICING POWER BECOMES A COMPETITIVE ADVANTAGE

Once you’re on the other side of implementing a price increase, you can begin to appreciate how much your value elevates you in the marketplace, separating you from your competitors and cementing your relationship with your clients. And that, my friends, is a competitive advantage.

Balentine LLC (“Balentine”) is an investment adviser registered with the U.S. Securities and Exchange Commission. This information has been prepared by Balentine LLC (“Balentine”) and is intended for informational purposes only. This information should not be construed as investment, legal, and/or tax advice.

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