Business with USPs versus business in commodities

by Ashvini on February 20, 2012 · 2 comments

in Business

If you ever visit India, go to old markets in any city (where malls have not made entry yet). You would see at least hundred shops selling the same kind of goods ( clothes, utensils, groceries). If you are a traveler from outside the country, you wonder how would you choose between shop A and shop B because most of them look the same. It would seem all the shops have procured goods from the same vendor and now they are selling them at different prices.

Commodity business, USP

The good thing is that you can walk out on one seller at a price and you would see many other sellers trying to entice you. If you are adamant you can get very close to the price you want.

Is there something for budding entrepreneurs to pick from this story?

It does not take much  to get into a business that deals with things where there is already a market. A grocery store is really easy to set up( so is providing consulting only on price) . One buys from vendors and sells to customers. They act as an intermediary that benefit out of the price differential. A business where one is selling something is often easy to enter.

Here are the strengths

  1. You know what sells and you can stock it
  2. You don’t spend that much on marketing
  3. The market is established: If people like coffee and they already go to coffee shops, you know they will come to yours as well.
  4. Nobody will sell below a certain price. Of course people will secretly under-price their goods but so can you .

But here are the problems

  1. You get a smart customer, who checks prices at all shops before he arrives to your shop. You get an idea that he knows the price. Either you sell to him or he moves on.
  2. If you can open a grocery shop, so can others. With every new shop, your customer segment gets divided. Its hard to get new customer and thus sales may reduce.
  3. A far bigger competitor can give you a run for money or can even force you to shut down.
  4. You may never be able to raise prices , not be able to differentiate because everyone is selling the same thing.

Thus if you sell what everyone does, you also face similar problems as everyone. In long term, the chances of lower profitability are extremely high.

A business with unique selling proposition (USP) which either has  new way of doing business or is selling a new product suffer from its own problems

  1. Initially , the target market needs to grow. So a business needs to spend money
  2. Its difficult to create a demand for new products
  3. It may be a long time before reasonable sales happen

But see the long term benefits( if you operate a business with USP)

  1. You set the prices and you can increase or decrease at your will
  2. You become a leader in  your own segment
  3. You build a brand
  4. By the time a competitor arrives and your business becomes commodity, you already a big player.
  5. Your employees are more happy because they specialize in business
  6. You have more reputation

While there are risks and costs associated with having a USP but in long term as an entrepreneur, it will serve you better.

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