The Art of (Price) War
Low prices sound good, but can you slice deep without hitting profit?
In 1998, VC-backed online DVD retailers had slashed prices to as much as 50 percent below retail. Not good news for 28-year-old Jeff Rix, who started DVDEmpire.com in 1995 in Warrendale, Pennsylvania--long before the price wars--with just $6,000 and a business model that called for pricing just 20 percent below retail. Online DVD retailers, including Rix's 42-person company, were buying DVDs for no more than 35 percent off retail. "The [other companies] were losing money on every transaction," Rix says.
Rix couldn't go as low as his competitors and live, but cutting profits almost to the bone, he reduced prices to 30 percent off retail. That made him one of the highest-priced DVD retailers, but by concentrating on service and surfing the surge in DVD sales, he kept growing despite the markdowns by deep-pocketed companies like Amazon.com, DVD Express and Reel.com.