Business By Hormozi #269: Lose It – The Reality Behind “We’ll Make It Up in Volume”
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The Pitfall of “Lose It” in Business
“Most business owners think: ‘We’ll make it up in volume.’ What actually happens: ‘We’ll lose it all in price.’” This quote sheds light on a common misconception in business: that increasing volume will always lead to higher profits. Many business owners believe that they can cut prices to attract more customers, and the sheer volume of sales will compensate for the lost margin. However, the reality is often quite different. Instead of making up for lost profits, businesses may find themselves “losing it all in price,” as they struggle to balance volume and profitability.
Let’s explore the story of two business owners—Tom and Alice—who each took different approaches to pricing and volume. Their experiences show why understanding the balance between price and volume is crucial to sustainable growth.
Tom’s Approach: Lose It in Price
Tom owned a small electronics store in a competitive market. After seeing a large discount retailer gain significant market share by offering deep discounts, Tom decided to follow suit. He slashed prices on his products, believing that the increased volume would make up for the reduction in margin. He hoped that customers would flock to his store due to the unbeatable deals.
At first, Tom saw a slight increase in foot traffic. Customers loved the low prices, and sales started to climb. But soon, Tom began to notice the downside. The lower prices meant that his profit margins were razor-thin. With the increase in sales, he also had to deal with higher operational costs—more staff, more inventory, and more logistics. While he was selling more, the price cuts eroded his bottom line, and Tom soon realized that the increase in volume didn’t make up for the losses in price.
His overheads continued to rise, and the margins on his products kept shrinking. Tom found himself working harder than ever but not making the profits he had expected. His business was struggling to stay afloat, and he learned the hard way that trying to make it up in volume while cutting prices too deeply could lead to financial ruin. He had “lost it all in price.”
Alice’s Approach: Balancing Volume and Price
Alice, on the other hand, ran a boutique coffee shop in a trendy neighborhood. She knew that her customers valued quality, and she set her prices accordingly. Instead of focusing solely on increasing volume, Alice emphasized creating an exceptional experience for her customers. Her shop offered unique blends, artisan pastries, and a cozy, inviting atmosphere. While she wasn’t the cheapest coffee shop in the area, she focused on delivering high value for the price she charged.
Alice didn’t cut her prices to compete with the bigger chains. Instead, she offered loyalty programs, bundled products, and special promotions that encouraged repeat business. She believed in building long-term relationships with her customers and providing them with something they couldn’t get at a discount retailer: a personalized, high-quality experience.
Over time, Alice saw steady growth. Her customers were willing to pay a premium for the value she offered, and her business remained profitable without having to rely on volume alone. Alice’s ability to balance quality and price allowed her to avoid the pitfalls of “losing it all in price” and instead focus on building a sustainable, profitable business.
Why Lose It Happens in Price
The lesson here is clear: price is important, but it shouldn’t be the sole driver of your business strategy. Cutting prices in an attempt to increase volume can often lead to a race to the bottom, where you end up with more customers but less profit. Here’s why this happens:
Lower Prices, Higher Costs – The more you sell at lower prices, the higher your operational costs become. Discounts often lead to increased demand, but they can also increase the cost of goods sold, marketing, and logistics.
Eroded Profit Margins – When you lower prices too much, the margins on each sale become smaller. Even if you’re selling more, the profit from each transaction may not be enough to cover your fixed and variable costs.
Unsustainable Business Practices – At the end of the day, a business that relies solely on volume to make up for lost price cannot sustain itself. Without sufficient margins, it becomes difficult to reinvest in the business, improve products, or weather financial setbacks.
The Importance of Understanding Price and Volume Balance
To build a sustainable business, it’s crucial to find the right balance between price and volume. Here are a few key strategies to help you avoid the trap of “losing it all in price”:
Know Your Value Proposition – Understand the unique value your business provides and price your products accordingly. Don’t be afraid to charge a fair price for the value you deliver.
Focus on Quality – Competing on price alone isn’t sustainable. Instead, focus on providing exceptional quality, whether that’s in your product, service, or customer experience. Customers who value quality are often willing to pay a premium.
Diversify Your Revenue Streams – Don’t rely on a single product or service for your business’s success. Look for opportunities to diversify your offerings, whether through upselling, bundling, or offering new products.
Measure Profitability, Not Just Volume – While volume is important, profitability is even more critical. Focus on how much profit you’re making per unit sold and ensure that your business is operating at a sustainable margin.
Conclusion
“Most business owners think: ‘We’ll make it up in volume.’ What actually happens: ‘We’ll lose it all in price.’” The pursuit of volume can be tempting, but it’s crucial to understand that cutting prices too deeply can lead to a loss of profitability. By balancing volume with price and focusing on quality, you can build a sustainable, profitable business that thrives in the long term.
Moral: "We’ll lose it all in price."
