The Challenge of Competing Against Larger Rivals
I don’t have to remind you about all of the challenges you face as a small business owner. Most business owners I know relish some of these, like wearing multiple hats, and the sense of controlling their own destiny. But one challenge in particular—competing against the buying power of larger rivals—is difficult to love.
Larger companies get the advantage of economy of scale in two main ways, (1) through buying power that lets them purchase raw materials at lower cost, and (2) through the ability to absorb fixed costs, or spread them across more units sold. The result is higher margins. The same principles work to make marketing investments more profitable.
The following example shows two hypothetical companies competing in the same market, with the following assumptions:
- It costs both companies $25k to develop fixed marketing assets, such as a website, brand identity, signage, etc
- Both companies spend 10% of revenue toward marketing, but Company B has 2x the revenue, and thus 2x marketing budget.
- Both companies experience the same return on marketing spend of $2 per $1 spent
In this example, a marketing spend of 10% of revenue doesn't produce positive ROI for company A. The leftover budget after paying fixed marketing costs is insufficient to drive enough traffic.
This is just a simple illustration, but I hope a couple points are obvious:
- Fixed costs must be recouped before profitability can be attained.
- The ratio of fixed costs to overall marketing spend impacts how quickly ROI can be achieved.
- It's a mistake to assume that half the budget will deliver half the results. Each situation is different.
Some Tips on Stretching Smaller Marketing Budgets
Company A has three options:
- Decrease fixed marketing costs - but be careful not to harm conversion rates. You can blow through lots of advertising dollars without good tools to capture and convert visitors to sales. With that caveat in mind, Company A should explore options for deferring the fixed costs that will have the least impact on conversion, and shift those dollars to variable marketing investment. Then re-evaluate 6 or 12 months into the future if those fixed investments should be reprioritized.
- Find a way to fund levels of investment needed for positive ROI.
- A strong marketing plan provides both the confidence needed for internal investment and/or the rationale to obtain external funding.
- Be conservative and do due diligence on your assumptions. Plan on 3 to 6 months for most marketing initiatives to turn positive, at which point your incremental profits can replace and pay back any external funding.
- Rethink the marketing strategy altogether.
- Be scrappy. What organic and low cost tactics can be employed? Look for win-win promotional partnerships.
- Don't forget your existing customer base. Reputation trumps all, and word of mouth is still the best way to grow your business if you can find a way to actively promote the behavior.
- Find tactics that are working, and double-down on those efforts in order to create reinvestment capital. One past client wanted to expand into a related offering because of better profit margins. However, the space was also more competitive and costly. So they utilized a short term strategy to generate cashflow through a less costly product line which they then used to fund expansion.
Leveling the Playing Field with Big Business
You may not ever be able to match your competitors' economies of scale. But that's not the only competitive advantage in town.
As a small business one of the best advantages you have is the ability to be nimble. Here's how to leverage that advantage:
- Have a plan. Being nimble doesn't mean being reactive. And it will help you say know how to respond to all those sales calls from small business marketing agencies.
- Have some risk tolerance. Risk can't be avoided. But don't avoid risk because of lack of information. Once you have a plan, you will be able to take calculated risks to grow your business.
- Leverage your existing customers. Customer experience is the most powerful branding tool you have. If your customers are delighted, be sure to make the most of this by simply asking for reviews and referrals. Rewarding customers for their loyalty can further encourage word of mouth.
- Don't skimp on creative. When there's no existing relationship, aesthetics and usability are especially important. Consumers use the web to choose between multiple providers, and one apprehension they have of small local shops is whether they are dependable, consistent, or professional compared with more known brands. Make sure your brand and web assets don't trigger that fear by looking cheap or dated.
- Know your customers. Large companies can have difficulty genuinely understanding their customers. Post transaction surveys can help, but go the next step and talk directly with customers. Direct conversational feedback from customers is loaded with insights, and most big businesses overlook it in favor of more "quantifiable" data..
- Seek Insights (not just data). Make sure your marketing partners or staff give you detailed performance reports that show which messages, offers, channels, platforms, product groups are performing best. But also recognize that data is easily misinterpreted. So be critical of what you see and piece it together with other knowledge from customer feedback, economic trends, and seasonal factors to come up with hypothesis about what is really driving behavior. This will help you continuously improve the efficacy of your marketing.
Shoot me your comments or questions! Or contact me if you'd like to chat about a project.