“Can you make that cheaper? The price is much too high for us?”
Are these some of the feedback you receive from sales reps?
SaaS market is driving fast into a state of perfect competition. This is the stage where companies are now price takers and not price setters. This means that, the demands of the market is driving prices downwards,
This can be caused by,
- Ease of entry into the SaaS market, AI, cheaper development and operation costs.
And proliferation of Product led growth strategies, can be much cheaper than sales led growth,, higher expectations from customers,
For example, most people now expect some freemium access, or extended free trial before purchase
Now what does economics tell us about a perfectly competitive market and profits?
Consider market B, where the existing Market equilibrium results in a high enough marginal revenue which gives economic profits from being higher than average total cost. Profit maximization takes place when Price > Average total cost and Marginal revenue =marginal cost, a short-run scenario if the firm is in a perfectly competitive market. Other firms will see the opportunity for profit and enter the market, in the long run driving the price down to zero economic profit (P2, MR2) causing firm B to reduce its supply down to Q2. Given the lower market price, the firm is producing at quantity Q2 where P =MR = MC =ATC.
In the other way round, if firm B’s market ends up so competitive that price drops further to P3 = MR3, Supply shifts right to S3 MR3 = MC but MR3 < ATC. Perhaps due to high fixed costs, overhead from producing much less. In the long run, the losses will be so much that some firms will exit the market, which will shift the supply curve back to the left, perhaps to S2, where the price is higher, profit maximization can be achieved at zero profit. Additionally Firm B can become more efficient using technologies, changing the composition of its fixed cost e.t.c to reduce its ATC (to ATC2), which will allow it to earn more profits at the market price.
In the dynamic world of business growth, understanding profit maximization is key. Imagine your company as a player in a perfectly competitive market – where price is set by the market itself.
Here’s a summary into the game-changing dynamics:
- MR = MC: The Profit Sweet Spot
- Picture a graph where Marginal Revenue (MR) meets Marginal Cost (MC). This intersection is where profit is maximized.
- Zero Sum Game: Perfect Competition
- In a perfectly competitive market, profit and loss eventually balance out. Why? Because companies here are “price takers” – MR remains constant. No single player can sway prices.
- Long term maneuvers
- Entry and exit of firms create ripples. Even with increased demand, prices rise temporarily, but oversupply normalizes it. Profits ebb and flow in this dance.
- Market B: A case study
- Consider Market B. Initially, profit soars as MR surpasses average costs. Others join the party, driving prices down, until profit levels out at zero.
Strategies for Leaders
- Leverage Technology and Innovation: Embrace cutting-edge technologies to streamline operations and reduce costs, giving you an edge in pricing.
- Diversification: Explore adjacent markets or product lines to spread risk and seize new revenue streams.
- Operational Efficiency: Continuously refine processes to lower Average Total Costs (ATC), making you more competitive without sacrificing quality.
- Agility and Adaptability: Stay attuned to market shifts. Swiftly adjust strategies to capitalize on emerging opportunities or mitigate risks.
- Strategic Partnerships: Collaborate with complementary businesses to amplify strengths and access new customer bases.
- Figure out a way to change how customers categories your product, For example from commodity to business essential. Differentiate with your customer experience
Remember, the journey to profit maximization in a competitive market is a strategic dance. Embrace shifts, optimize costs, and seize opportunities. 💡
#OperationsExcellence #MarketInsights #ProfitMaximization #ScaleUpSuccess #CompetitiveEdge
Let’s keep the conversation going! What are your experiences with profit dynamics in competitive markets? 💬
