Flashback Article from The Disc Jockey News print edition January of 2007:
Generally speaking, Mobile Disc Jockeys (MDJ) are always looking for the unique edge to set their services apart to gain the favor and trust of clientele. Free mileage, free dinner music, free karaoke upgrade, free wedding ceremony services, free audio video upgrade, buy a minimum set of hours and additional hours are free, free grooms dinner music. Basically, anything that one Mobile Disc Jockey (MDJ) may charges for, another competitor may exploit as free. The loss leader is defined as a pricing strategy which involves selling products/services at a price that will generate little or no profit and in some cases not even cover all associated costs (marketing, production costs, etc).
While the use of the loss leader strategy can be highly effective in retail applications. The concept fails miserably in service oriented industries where the major casualty is earning potential and family dynamics. Within service oriented industries loss leader strategies could be viewed as anti-competitive bordering on predatory pricing which may violate the essence of anti-trust laws drafted to protect both the customer and the marketplace economy.
Webster’s dictionary describes competition as: 1: the act or process of competing: rivalry a: the effort of two or more parties acting independently to secure the business of a third party by offering the most favorable terms.
Favorable terms is the key. So how does one achieve the most favorable terms? In a perfect world, one could presume that offering the highest quality reputable, service for an appropriate price would encourage customer patronage. Unfortunately, this is not a perfect world and there are nefarious entities willing to lie, cheat and steal their way through business in hopes of injuring their competition in the process. The misspoken rhetoric is a plea to buy into a “survival of the fittest mentality”. Faulty logic being miss-applied by people, in many cases, too ignorant to understand the further reaching implications.
While there is no specific definition to the multifaceted expression Economic Terrorism, one could summarize Economic Terrorism: as the systematic use of illegal acts or predatory pricing to coerce action that devalues equity, earning potential, business reputation or business credibility within a marketplace.
Here are two of several examples where predatory pricing has been in question:
Walmart and Rubbermaid
Madison, WI loses 240 jobs as part of a three-year plan to shed 5,000 workers and close one-third of its factories, due to Walmart’s refusal to accept Rubbermaid’s wholesale cost increase in an attempt to help defray production cost increases of resin (key ingredient to plastic containers). Walmart replaced Rubbermaid’s product with Sterlite which is a product of India. One incident of predatory pricing that induced the outsourcing of $87.5+ million dollars worth of American jobs.
Would outsourcing be as popular if import tariffs essentially equaled the cost of production on American soil, by American workers?
How can Walmart expect Americans to purchase goods that they have been denied the right to earn a living producing?
Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co.
Wherein Weyerhaeuser is sued for buying “more sawlogs than it needed” at “higher prices” in order to prevent competitors from buying logs at a “fair” price. Thus, tightening or eliminating their margin. The court reasoned that competitors who cannot afford the price of raw materials are squeezed out of the business, which directly diminishes competition. While the court acknowledged higher bidding can lead to increased competition by encouraging more companies to enter into the supply-side of the market, this positive result cannot be achieved in the lumber industry. Alder sawlogs are a natural resource of limited annual supply, the court explained, so the market is “inelastic,” or does not readily allow for expansion to new competitors. The district court awarded $26.3 million in damages which the appellate court trebled to $78.8. On June 26, 2006 the U.S. Supreme Court accepted Weyerhaeuser’s request to review the case. – PENDING-
This is where the loss leader strategy runs aground within the Mobile Disc Jockey (MDJ) industry. Several naive Mobile Disc Jockeys (MDJ) are under the false assumption that the Mobile Disc Jockey (MDJ) market place is elastic and contains unfettered room for substantial growth. On the contrary, the calculable average number of events per year ranges around the 2.2 million events. Much like the alder log resources, dances are limited by the annual supply of clients seeking entertainment services. The whole intent of a loss leader is to entice customers to your business in order to sell them other services to make up the difference while eliminating competition in order to gain an advantage in the marketplace.
Example 1: One of the least respected companies in the market offers video dance upgrades at little to no increase in price, despite the substantial overhead in equipment cost and video library. How is offering video as a loss leader possible? Perhaps the broadcasting watermark is a tell tale sign of origins of the library. Offering stolen broadcast media as a loss leader to entice patronage is an anti-competitive tactic that is the personification of Economic Terrorism.
Example 2: DJ company “X” attempts to enter an overpopulated marketplace by offering “First One Free” to schools and bars. This type of loss leader is dangerous because it runs contrary to every principle of customer loyalty. For instance, DJ “A” routinely charges a school $XXX for entertainment. DJ “B” offers “First One Free” and performs adequately. DJ “B” creates a new price point, in most cases lower than DJ “A” which devalues the marketplace.
Example 3: DJ company “X” in the past exclusively performed karaoke. As more and newer KJs offered loss leader strategies a marketplace shift takes place. KJs turned DJ/KJ invade the wedding market offering free karaoke upgrades, thus further devaluing the public perception of karaoke in both marketplaces despite the substantial investment needed to properly service the clientele.
Good competitive behavior can include short-term price reductions, which is acceptable and encouraged, so long as the core of the marketplace can still make a profit after cutting prices where product/service choices and quality DO NOT suffer when restraint is imposed upon the prices that are necessary to induce growth.
This is where the use of loss leaders fundamentally fails within the Mobile Disc Jockey (MDJ) industry. Many Mobile Disc Jockey’s (MDJ) revile the term hobbyist yet use loss leaders and predatory pricing tactics that run contrary to a legitimately run profitable business.
The IRS determines the difference between hobbyist and legitimate business as:
12.7 Small Business/Self-Employed/Other Business : Income & Expenses
Q How do you distinguish between a business and a hobby?
Since hobby expenses are deductible only to the extent of hobby income, it is important to distinguish hobby expenses from expenses incurred in an activity engaged in for profit. In making this distinction, all facts and circumstances with respect to the activity are taken into account and no one factor is determinative. Among the factors which should normally be taken into account are the following:
1. Whether you carry on the activity in a businesslike manner
2. Whether the time and effort you put into the activity indicate you intend to make it profitable
3. Whether you depend on income from the activity for your livelihood
4. Whether your losses are due to circumstances beyond your control (or are normal in the startup phase of your type of business)
5. Whether you change your methods of operation in an attempt to improve profitability
6. Whether you, or your advisors, have the knowledge needed to carry on the activity as a successful business
7. Whether you were successful in making a profit in similar activities in the past
8. Whether the activity makes a profit in some years, and how much profit it makes
9. Whether you can expect to make a future profit from the appreciation of the assets used in the activity
When considering any loss leader campaign in an attempt to corner, increase your market share or injure your competition.
Truly ask yourself:
Are you a responsible and competitive business person building your business to grow and perpetuate? -or- Are you an anti-competitive Economic Terrorist plotting the demise of your competitors by price with little or no regard to the marketplace that you‘re creating?
Dude Walker can be reached at firstname.lastname@example.org.
Flashback Article from The Disc Jockey News print edition January of 2007: