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What advisers are saying: The race to the bottom

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An old joke: A shop owner buys pencils for 10p a piece, then turns around and sells them for only 5p. Noticing this bizarre behaviour, his partner asks, “How do you expect us to stay in business that way?” The man replies, “Volume!”

Cutting price is easy to do but difficult, if not impossible, to sustain as an ongoing strategy.

In every market, there is always going to be only one lowest-price producer. No points for being the second-lowest price provider. Apparently, 78 per cent of Walmart shoppers drive past a Kmart on their way to Wal-mart.  If you are the CEO of Kmart, how depressing is that?

The race to the bottom continues in earnest in the investment industry and, as Nic Cicutti commented last week, the pursuit of lower charges has become the number one concern among advisers, investment providers, life offices and platforms.

Even with AUA rapidly expanding, costs have continued to outstrip revenues (or at least keep pace) due to a combination of reducing profit margins and increased development spend.

Recent research from Altus Consulting concluded that while total revenues among platform providers have more than doubled since 2006, costs have also increased at the same rate and, as a whole, the industry still makes an operating loss. 

There is always the opportunity to lower prices, cut corners, de-prioritise quality and suck it up as we race to grab more market share. But the problem with the race to the bottom is that you might win. Price differentiation is a dangerous game.

Someone will always find a way to be cheaper or more brutal than you.

Stripping out costs that do not drive value and being competitive on price are clearly important. But it should be just the start. Far better to build loyalty to you, not your price. True (enduring) value is focused on design and respect and guts and innovation and sustainability.

It is also risky, of course, but it is a long-term path with a far more desirable outcome.

Here’s why. In any industry, whatever the perceived cost, there is always a spot for the best in the market. Not the most expensive, but the one that most ideally suits the needs of your chosen audience.

It is easy to get lost in the quest for cheaper. But if you are the best, no market is too crowded.

The hard part is working out what ‘best’ means.

Phil Wickenden is managing director of So Here’s The Plan phil@soherestheplan.co.uk

Extracts from IFA interviews…

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