Summary

Companies may invest in non-profitable projects as strategic moves to retain customers, enter new markets, and eliminate competition.

Abstract

The article discusses the strategic rationale behind companies engaging in projects that may not be directly profitable. It emphasizes that such investments are not necessarily due to poor planning but are calculated strategic decisions. These projects can serve multiple purposes: maintaining customer loyalty in the face of competitor actions, gaining a foothold in new markets by initially operating at a loss, and establishing a presence to attract high-quality clients. The article also touches on the concept of dumping, where a company sells below cost to drive out competition, although this practice is illegal in many jurisdictions. The overarching theme is that short-term financial losses can lead to long-term strategic gains and market positioning.

Opinions

The article suggests that not all projects are intended to be immediately economically profitable, with the understanding that they serve a larger strategic purpose.
It is implied that tactical project success is different from strategic success, with the latter focusing on long-term growth and brand consolidation.
The author believes that presence at certain events or markets is essential to retain customers, even if the direct return on investment is not evident.
The case of BlaBlaCar is presented as an example of how a service can be initially offered for free to build a network effect, which is crucial for the service's later success and monetization.
The article indicates that in industries where prestige is important, companies may need to undertake low-profit projects to build trust and status, which can be more valuable in the long run.
The practice of dumping is acknowledged as a strategy to eliminate competition, but it is also highlighted as an illegal and unfair trade practice in many countries.

Understanding non-profitable projects: the strategic positioning

Some thought they were crazy, but they were making money.

One of the most interesting facts that every entrepreneur should learn about companies is that not every project is thought to be economically profitable by itself.

Of course, it does not mean that the company will not receive profit in its own way. However, the costs of the project can be higher than the revenues. This is not due to bad planning or poor resource utilization, or it is not necessarily the reason. Actually, the costs are assumed as a strategic investment.

And here I feel the necessity of making use of the terms of tactics and strategy. A profitable, well-executed and organized project requires some tactics. Long-Term growth, market positioning, and brand consolidation require strategy.

“All men can see these tactics whereby I conquer, but what none can see is the strategy out of which victory is evolved.” — Sun Tzu

The writings of the famous Chinese general Sun-Tzu [1] are still teaching businesspersons nowadays

So, what are the possible strategic reasons for a company to invest their resources in an apparently non-profitable project?

· Retain your customers.

It is very common that the competency launches a new product, develops new marketing campaigns or attends events in which they can gain great visibility in the market. In these cases, your company needs to react to the situation by investing their own resources into keeping the loyalty and satisfaction of the customers.

It is, you may not want to attend an international fair to gain new customers because it is not rentable, but you have to because if you are not present, the competency will reach those customers. You are not playing the game to sell your product or service, but to avoid losing current customers.

As one of my professors told me, you go there because the people expect you to be there. If they do not find you, they will find the others.

· Open to new markets

International marketing is sometimes hard to manage. Depending on the product or service, your audience will be very different from one place to another, and the characteristics and relationship expected from the customer will vary. It may be useful to make a strategic approach to the first customers without expecting high revenues, to understand the future situation.

Internationalization can be the key of success for many companies, but it is also a big challenge

For example, we can analyze the case of BlaBlaCar [2]. The company started in France, but then they launched their service abroad. In the beginning, the service was completely free: passengers would need only to pay the driver, and BlaBlaCar did not charge any additional cost. This strategy made possible to reach the first users, attracted by the ‘cheap’ service. Since BlaBlaCar’s service is based on a strong network effect, reaching a certain number of initial users were absolutely required. These users generate enough value for the service to make new users keep joining, even paying additional costs. And then, BlaBlaCar established his business model based on management fees per transaction.

But not only internationalization can benefit from this. Some business based on luxury and military products or governmental services will require the company to demonstrate some reliability and status. To reach some high-quality customers, one may need to assume the costs of low profitable projects to gain the trust of the market. This way, you are visible and considered by potential buyers.

Some industries are monopolized by a bunch of companies, not only for the quality but for the prestige

For example, working with various European governments may need to sell the first solution at a very low cost, even without direct benefit, so that you can later show your portfolio to the other states and charge them properly.

· Eliminating competence

This is a complicated case because the strategy reaches the point of unfair competition. A company may decide to sell their products or services below cost for some time, to make the competency lose money and eventually get out of the market. Big companies can abuse then of their predominant position to eliminate the smaller competency, and it is certainly punished by the law in many countries.

This is the concept of Dumping [3], which is most commonly used for international trading. Of course, it is censored by international trade organizations like the World Trade Organization and the European Union.

Conclusions

In the time of the Internet, brand positioning is one of the most recurrent problems for online marketers. For a company to lead its sector, it must be constantly working on keeping the top position and reaching new customers.

The same way companies invest resources in publicity, they must be ready to invest their money, labor and time in non-profitable projects that will open them the doors to the growth.

This article mentioned the most common general cases, but possibilities are as many as businesses are there in the world.

You may NOT need to leave the Comfort Zone

Consider expanding it from the inside

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References

[1] Suntzustrategies.com. (n.d.). Six Principles of Sun Tzu & the Art of Business — Sun Tzu Strategies. [online] Available at: http://www.suntzustrategies.com/resources/six-principles-of-sun-tzu-the-art-of-business/ [Accessed 24 Jun. 2018].

[2] BBC News. (2017). How to start a global transport network. [online] Available at: https://www.bbc.com/news/business-38597504 [Accessed 24 Jun. 2018].

[3] Amadeo, K. (2018). Trade Dumping and Its Consequences. [online] The Balance. Available at: https://www.thebalance.com/what-is-trade-dumping-3305835 [Accessed 24 Jun. 2018].