What SMEs can learn from highly competitive sectors

By Richard Bowman

As the digital age evolves, the barriers to entry are falling away in almost every industry. In the 1990s, it was only the knowledge economy that was being disrupted. But in 2017, almost every industry is at risk of being replaced by an app.

SMEs are at risk too. Software platforms, like Uber and Airbnb, allow new competitors to enter a market with minimal start-up capital and very low overheads. SMEs can find themselves up against brand new competitors whose only USP is lower prices. In addition to that, the web and app markets mean that competition is no longer local in any way, it is very much global.

And, in an economy where everyone is being squeezed, price becomes everything.

Innovate well, or emulate cheaply

Consumer electronics is a highly competitive sector. Almost everyone on the planet now has a mobile phone, and many have a notebook PC too. Apple doesn’t compete on price and has a relatively small share of the global smartphone market – and yet it is the most valuable company in the world. Apple has a very loyal customer base who are prepared to pay a steep premium for the latest in innovation.

On the other hand, Ericsson, now Sony Mobile, and Nokia got into trouble trying to innovate. Samsung meanwhile has built a formidable business by emulating the best products produced by other manufacturers. In the early 2000s, they were happy to emulate Nokia’s phones. These days they produce smartphones that do 80% (if not more) of what an iPhone does – for a fraction of the price.

The lesson for SMEs is that they need to decide if they can really be the Apple of their industry. And if they can’t, they should focus on emulating at a lower price.

Know what a customer is worth to you

Online gambling is a good example of this. It’s a very lucrative industry, but profitable industries attract lots of competition. Yet, certain online casino gambling sites like Guts.com have managed to thrive in this environment. How do they do it? These sites have embraced the combination of content marketing and rewards for new customers.

Content marketing through affiliate sites and social media is a full-time job for the online gambling industry. They know they must cast the net as wide as possible. They also know they need to offer generous rewards to attract new customers. To do so they also need to know how much a customer is worth to them.

SMEs facing increasing competition may need to cast the net wider, They may also need to pay to gain each new customer. And that means they also need an understanding of their different market segments and what the customers in that segment may be worth to them.

Upsell to profitability

The budget airline industry is one of the most cutthroat around. Airlines operate on such tight margins that sometimes the difference between a profitable and a loss-making flight comes down to one extra seat. Airlines like JetBlue and EasyJet make their profits by selling a seat at cost and then upselling to that customer.

Budget airlines know that when most travellers book a flight, their primary concern is the price. If they don’t compete on price, they don’t sell seats. So they sell their seats at cost, or even below cost, and then work out how to make the flight profitable. They can do so by selling extra legroom, priority boarding or drinks and snacks.

Sometimes small businesses may need to find ways to win the customer first and then find figure out how to build a profitable relationship with that customer.

To survive in the digital age every business needs an edge. SME owners and managers can learn other lessons by looking at other competitive industries like retailing, banking and insurance to find techniques to make their own businesses more competitive. This may require some creative thinking. But the effort will be well worth if a new source of competitive edge is discovered.

Richard Bowman is a business and investment writer based in Cape Town, South Africa