The Green Sheet Online Edition
June 09, 2014 • Issue 14:06:01
Pizza pies and basis points
It was the spring of 2012, and financial turmoil roiled the world. U.K. unemployment reached a 17-year high. Greece, with mounting fiscal woes, accepted a bailout contingent on strict austerity measures. And, more locally, a vicious economic conflict was gearing up in the streets of New York City. It wasn't really the "streets of New York City"; it was a two-block strip, or 528 feet of concrete. Over a period of several months, 6th Ave. between 37th and 39th streets would see a price war of such intensity that veterans of it would be telling the story for years to come.
It all started with slices of pizza being sold for $1.50 by Bombay Fast Food. Things were fine until Joey's Pepperoni Pizza opened by the corner of 39th Street and offered slices for only $1. This initial transgression opened the door to the ensuing conflict. Bombay Fast Food quickly lowered its price to $1, matching the new contender. The air was tense with conflict. Both parties waited to see what the other would do. Until, a few months later, a new player entered the pizza market: 2 Bros. Pizza. The new entrant opened next door to Bombay Fast Food, the two businesses separated by only a stairwell.
There was stability for the first few months until March 2012 when, during the night, Bombay Fast Food lowered its price to $0.79. Underlying hostility rolled over into outright conflict. Those perilous shots had been fired at Archduke Ferdinand. War had been declared, and prices across the board were about to drop.
Upon seeing the lowered price in the morning, 2 Bros. Pizza immediately lowered its prices to $0.75 a slice. Unwilling to be undercut, Bombay Fast Food matched the price. Pies went from $8 to $5.99. The two slices and a drink special went from $2.75 to $2.25.
The owners of both establishments claimed the other was trying to put them out of business, but both refused to back down. Mr. Kumar of Bombay Fast Food was quoted as saying, "We may go to 50 cents. … I want to beat him." Mr. Halali, one of the owners of 2 Bros. Pizza, said to the press, "We might go to free pizza soon." At this point neither party was making a profit on its slices; they were both simply undercutting the competition in a constant effort to take their customers.
How does it happen?
Does any of this sound familiar? While we can assume a large cross section of The Green Sheet readership does not partake in dough kneading or mozzarella sprinkling, we think most of us know a thing or two about dwindling prices. During our time in the merchant services business, it has become common to see statements indicating a merchant is paying interchange plus 5 basis points and $0.05. Pricing that was once reserved for clients processing in the $100,000+ range has filtered down to merchants doing a mere $10,000 to $20,000 in monthly transactions.
As this has become increasingly common in our area, we asked members of GS Online's MLS Forum whether they, too, had been experiencing rate marginalization in their respective markets. The answer was a resounding yes with user StreetSweeper, who told us, "The Greater Phoenix market is hyper competitive." User Mbruno stated, "I'm not sure there's a segment of this industry that has not experienced rate marginalization."
What contributes to rate marginalization?
This brings us to the question: What allows rate marginalization, or a price war, to occur? There are two primary factors that lead to this phenomenon in our industry, and they are paralleled in the pizza war of New York's 6th Ave:
- Lack of product differentiation: When a product or service is viewed as a commodity, something constant regardless of who the seller is, it makes no difference to buyers where they obtain it. All that matters is how much they paid for it. When both slices of pizza taste the same, does it matter whose name is on the seller's awning? This becomes a large factor in our industry when a merchant level salesperson (MLS) brings no additional value to the table and is unable to sell on anything except price. In an environment where a salesman's only means to acquire business is to lower profits, it quickly becomes a race to the bottom in a zero-sum game.
- Penetration pricing: Sometimes when a new company is attempting to enter a market, it will undercut the pre-existing players in a bid for market share. This can only be an introductory strategy, though, or else the new entrant will impact its own long-term sustainability. An example of this would be a new MLS willing to price his or her first accounts negligibly for the purpose of simply getting some experience and volume in his or her portfolio. However, this cannot remain the constant, or it will take far too long to build a reasonable residual stream. When Joey's Pepperoni opened by 39th St. the proprietors thought their $1 slices would be the key to driving business their way. Unfortunately, this act only started a downward spiral of dwindling profits for all parties involved.
How do you defend yourself?
We asked the forum if rate marginalization has affected their business strategy and offerings. We received excellent and thoughtful responses from our fellow salespeople.
User Steve Norell stated rate marginalization forced his team to become more aggressive; they decided to build in-house "value added products" (VAPs) to expand their offering. MLS Forum member Truth echoed the advantage of technical know-how. He noted how grateful he was for his technology background and the leg up he felt this expertise provided. He stated that without it "you will continue to appeal [only] to the small merchant that is resistant to technology changes." Truth added that without that knowledge, ISOs and MLSs would have to look outward for their technological products, and turning to VARs would likely become the only opportunity for growth.
Technology appeared to be a common theme through the conversation. User Mbruno commented that price marginalization caused his team to place focus on developers instead of solely on sales agents. "The addition of developers to our sales teams has already netted some big results and there's a lot in the works right now poised for even bigger results," he wrote. As they say, when one door closes, a good salesman will create a newer, better window.
Forum member StreetSweeper also brought to the table the importance of relationships and honest communication with merchants. He stated, "When one cuts through all the smoke and sales hyperbole, owners understand when you talk with them about protecting margins. Any business owner not watchful and protective of their margin is soon out of business."
This is an excellent point, but StreetSweeper noted that this will not work with everyone. Merchants who need the lowest price, because success within their market niche is dependent upon being the lowest cost option, are typically the prospects who give him the most blow-back. Since those aren't his target clients anyway, this strategy can be seen quite successful for market segmentation and qualifying a merchant.
Make dough while you bake dough?
MLS Forum members did a great job in highlighting strategies for success in an industry with a shrinking margin for its flagship product. Setting up in-house development for technology or VAPs was pointed out by Mbruno and Steve Norell, while user Ccguy suggested emphasizing hardware sales, such as POS systems.
StreetSweeper pointed to targeting merchants who are not focused solely on the lowest rate and instead "being their go-to partners for a) when they run into problems, or b) keeping them industry-current with resources that can forward or streamline their business operations."
His answer is a strong reminder of the economic theory behind price wars: when lowering the price of a product, a business is simply adjusting one variable with the intent of capturing a specific customer base. It is in no way a magic bullet that will attract everyone, just those who associate a particular price with their perceived value of the product. There are still those who can afford to, and are willing to, pay more for something they think is worth it. This is why the window sticker on a Bentley still reads in the range of hundreds of thousands of dollars.
Unfortunately, the business owners on that 528-foot strip of 6th Ave. did not demonstrate this kind of out-of-the-box thinking. Neither tried adding variety to their menus with chicken or burgers. No one tried becoming the high-end pizza of 6th Ave., offering fancy toppings and exotic items to reach a specific crowd.
Instead, their war ended with a handshake and an armistice. In what would likely be determined collusion if it ever went to court, the owners of Bombay Fast Food and 2 Bros. Pizza simply agreed to raise their prices to $1.00 and leave them there. With the consideration that regulators and merchant lobbying groups would never allow a move like this in our industry, it's a good thing that many of us have figured out creative ways to turn obstacles into opportunities.
Tom Waters has been dedicated to the merchant service sales profession since 2001. Currently, he is responsible for cultivating relationships with entrepreneurs in information technology, accounting, sales and marketing in his role as Sales Director of Bank Associates Merchant Services (www.bams.com). Using fresh and matter-of-fact training methods, Tom has contributed to the success of thousands of agents, affiliates and clients. He can be reached via email through email@example.com or via phone at 347-651-1065.
Ben Abel is Regional Director at Bank Associates Merchant Services. Since joining the team in 2006, he has risen through company ranks with a paradigm that his success was measured by the success of those around him. Ben is a dedicated, pioneering trainer whose methods of merchant services consultation have helped many agents expand their portfolios in terms of processing volume, deal count and profitability. He can be contacted at 347-866-9571 or firstname.lastname@example.org.
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