Capitalizing on a competitor’s mistakes can seem a bit awkward for many small business owners. Some feel badly profiting from someone else’s misery but in reality there is no reason to feel this way. Our economy grows stronger as companies that make the right decisions expand while those that tend to make poor decisions grow weaker and shrink until they close. Resources need to flow to those companies that can best put them to productive use. We are all hurt by having zombie companies consume resources without offering any clear benefit to anyone.
If your company tends to make good decisions, then you should be prepared to act when a key competitor makes a mistake which grants you an opportunity to capture market share from them. One recent example of how companies can leverage competitors’ mistakes is taking place right now in the financial industry's decision to enforce additional fees upon its customers.
When a competitor decides to increase prices, this doesn’t necessarily create an opportunity for you to capture their customers. It actually depends on several factors, most important of which is how your competitor communicates this price increase to customers. If they do a poor job of announcing and explaining the price increase, then you have a window of opportunity to leverage that mistake to grow your business at their expense.
Credit Unions across the country did a good job of capturing new customers at the expense of large financial institutions recently because of poorly communicated price increases on the use of debit cards and other products by large banks. According to the Credit Union National Association, nearly 700,000 consumers opened accounts at credit unions last month mainly as a response to fee increases by large banks.
Several months ago, major financial institutions announced they would increase certain fees and add new fees, like the monthly debit card usage fee. The announcement of the price increases was poorly made for several reasons.
The first of which was timing. Large banks have received hundreds of billions of dollars from the Federal government over the past several years while at the same time lending has significantly decreased. This created the perception that banks are holding back at the expense of their customers. Charging $5 a month to use a debit card in this light seems unfair. Making matters worse is the state of the economy. The average Joe and Jane are struggling with high unemployment, large mortgage debts, high-interest credit card bills and inflation in consumer staple prices.
Banks also made the mistake of poorly positioning the fee increases. The price hikes were seen by many as retaliation for new legislation meant to protect consumers from certain abusive practices. The legislation had a direct impact on bank profitability and as a result they looked for opportunities to compensate for the losses via fee income, such as the debit card fee. This positioning gave the impression that banks and consumers are at odds. This may not be a fair characterization of the price increases, but regardless of their fairness many consumers perceive them as real.
And so, competitors move in. Credit Unions, aided by consumer advocates, recognized that this situation represented an opportunity to acquire customers from large banks. They acted and successfully captured a significant number of new customers as previously indicated. The effort worked because Credit Unions as an industry:
- Offered a competitive product;
- Positioned themselves as being on the side of the consumer; and
- Prepared their operations for the influx of new customers.
It’s not enough for your competitor to make a mistake; your business has to prepare itself accordingly to benefit. Doing so can provide an effective method to capture new customers at a low acquisition cost.
