There is no business without competitions; the days of the monopolist are long gone. Regardless of how relatively new an industry may seem, a careful research will reveal two or more other competitions. So like I often remind entrepreneurs, since very few businesses exist in isolation, what are you going to do about the competition?
The existence of competitions in any given industry changes the playing field. Businesses in an attempt to gain higher market share adopt various competitive strategies to increase their competitive advantage. And one of the most obvious competitive strategies businesses easily adopt in the face of intense competition in an industry is the price war.
What Is The Price War?
According to Michael Porter’s generic competitive advantage strategies, this is known as cost leadership. The price war describes a market situation where the existing competitions struggle for market share by cutting down the prices of their goods/services. It is a race to the bottom; an attempt to win customers by offering lower prices.
The problem with this competitive strategy is this: even though you win the race to the bottom by offering the lowest price in the market, you will most likely end up at the bottom. What does this imply? Winning by cutting prices is more risky to your business than winning by offering superior value.
Very few companies win the price war by offering the lowest prices and they do so because they have lower costs of production as a result of higher efficiency. Such companies are referred to as low-cost leaders and examples are Wal-Mart, South West Airlines, Ikea, MacDonald’s, etc.
How To Win The Price War
What’s the best strategic response for winning the price war? If you are going to win the price war, don’t get into one. The best way to win the price war is to avoid it. How do I mean?
When your competition begins to slash prices in order to win the customer, don’t fight back by also slashing your prices. Rather, take the opposite direction by fighting back with superior value. I offer the following superior value competitive strategies:
Re-target Your Market
The price war like I had earlier said is a race to the bottom. Choosing to compete on price alone is the recipe for being at the bottom of the competitive ladder. It is choosing to serve the lowest segment of the market.
Every market is divided into three categories/levels: the upper-class, middle-class and lower-class. Going head-to-head with your competitions over price is indirectly going to force you to accept the lower-class as your default target market. By deciding to lower your prices, you must realize that you have also indirectly decided to lose the upper and middle-class segment of the market.
The lower you go with your prices, the more appealing your products/services becomes to the lower-class target market and the less appealing it becomes to the upper and middle-class. The lower-class are the majority in every market, they form the largest segment of buyers. The middle-class is the second largest segment of buyers, while the upper-class forms the minority.
Unless the lower-class is your ideal target market, don’t get into a price war with your competitions. Price is an estimation of quality and the general perception is that the lower your price, the lower the quality. If you can’t find a way of lowering your costs of production, in order to earn profits by offering lower prices, then re-target your market.
Re-targeting your market is how you position your products/services to appeal to a particular market segment. Since in most cases to offer a quality product/service often costs more in terms of time and resources expended, then you are better off targeting the middle-class and the upper-class segment of the market.
The only time a low price appeals to all three segments of the market is when a commodity or consumer product/service is involved. These categories of products/services are referred to as fast moving consumer goods (FMCGs). They are your everyday consumables and because of the high frequency of use, they don’t attract high prices since they enjoy higher rates of turnover. Examples include detergents, toothpastes, food items, fruits, and anything that can be bought at the grocery.
So my question for entrepreneurs battling with the price war is this: why settle for the bottom of the market that is overcrowded when the top is free? Price is an issue because you are targeting the wrong market segment – the lower-class. As for me, don’t know about you, the top is where I want to be. I would rather die raising the bar, than live at the bottom!
Differentiate Your Offering (Branding)
The decision to re-target your market to capture the upper and middle-class market segment must be followed by a determination to differentiate your offering (product/service). This is what branding is all about. A brand is a differentiated product/service.
This is a conscious effort to establish a perceived meaning in the minds of your target market regarding your products/services. While the competition can be perceived as selling or offering a particular product/service, yours must be perceived as different based on the combination of certain unique qualities peculiar to your offering.
Every one of your branding efforts, from product packaging, to customer service, all must communicate the usefulness and uniqueness of your offering to your target customers. The market will not pay for more, unless you have given them both a logical and emotional reason to do so. Branding is what helps you achieve this.
Branding is all marketing efforts to improve the perceived image of your product/services in the eyes of your target market. It must involve the creation of a compelling story that will connect with your target market and the fulfillment of that promise in their lives. A brand is a product/service that means something to the target customer. For example, bottled water is a commodity, but Eva water, is a brand. Get the point?
So, to win the price war, do something different from the competition that will position your product/service in a world of its own, only then can you charge more. The upper and middle-class market segment value quality, so unless your offering has the mark of quality written all over it, you won’t appeal to them.
Many companies offer web design and internet marketing services, so to separate our own offering from the competition, we decided to turn it into a brand. First we gave it a very powerful descriptive brand name: differentiate online.
Secondly, we offered more than the average competitions around. They charged per web page created; we charged for unlimited web pages. With others, the more web pages you wanted your site to have, the more you had to pay. With us it wasn’t a question of web pages; it was a matter of functionality. Regardless of how much you paid, you had unlimited web pages.
Thirdly, we do more than design, we turn your website into a marketing tool that can help you find, attract, convert and retain profitable customers.
Lastly, we bundle our offering with a freebie, since we do not only build you a working website, we will also teach you how to make it work for you, for free!
Sell Benefits not Features
One strategic way of differentiating your offering (product/service) is to emphasize the results your target market wants and deliver on that result. I have always believed that the price war is for those who don’t know what they are doing. If you can give people the results they want and help them get rid of the problems they have and don’t want, then price is no issue.
The market is filled with so many people who are looking for the product/service that can meet their needs. They don’t consider price first in their purchase decision, they seek for utility first –the satisfaction/benefits they will derive from the purchase. For such people, don’t start with price, start with benefits. Why? Because price is a feature and not a benefit. The cost of a product/service is one of the features/characteristics of that product/service. It describes how much it costs and not what it does. And guess what, people buy products/services for what it does and not how much it costs.
So, carve your marketing message around a tangible result your target customers lack but eagerly want or around a painful problem they have but don’t want and you will get their attention regardless of price. The major reason price becomes an issue is when you flaunt features of your products/services in front of your target market rather than the benefits.
The moment you do this, you have succeeded in turning your product/service into a commodity rather than making it a brand. And nobody wants to pay more for a commodity. Why? Because they believe it’s available elsewhere. But the moment you start with benefits, the things they lack but want (results) or the things they have but don’t want (problems), then you have turned your product/service into something more than a mere commodity and they will readily pay more. Why? Because commodities don’t offer unique benefits, they offer generic features that bring generic benefits. Only a brand can deliver unique benefits based on unique features and guess what, the customers know this!
Offer Money Back Guarantee
Since the price war is essentially a money matter, why don’t we just get the issue of money out of the way and focus on what really matters: winning the customer. Which is more important: losing the sale because of price or getting price out of the way and winning the sale?
Suggesting that you get the issue of money out of the way doesn’t mean you give away your products/services for free, no. It only means you make the offer a risk-free proposition to the target customer. How? By offering a money back guarantee!
You see, very few people offer money back guarantee. Why? Because very few people can specifically identify the tangible benefits associated with their offerings (products/services) and so they can’t vouch for what they are asking you to pay for. The fact that you are bold enough to offer a money back guarantee tells the target customer that you are sure of your offering. This has already given you a competitive advantage over the numerous competitions who don’t offer money back guarantee.
As soon as money is out of the way since you offer a money back guarantee, the customer is willing to make the purchase knowing that they have nothing to lose. Then you can focus on delivering on your brand promise and if you don’t, then you are better off fighting the price war!
Offer A Free Trial
Another flip side to winning the price war by offering a money back guarantee is to offer a free trial for your product/services. This works a great deal because it allows the target customer to have a taste or preview of what you are asking them to pay for. And when they eventually do, if it’s something that delivers a result they currently lack or solves a problem they currently have, then money no longer becomes an issue to making the purchase.
When we ran our cyber cafe business, this was one of our most effective competitive strategies. It totally eliminated the barrier to winning the customer as a result of our higher prices. We had a tradition of offering first timers 10 minutes worth of internet access to assess our quality of service before paying for it. Again, this is a classical case of a risk-free proposition to the target customer. Since they had nothing to lose, they eagerly accepted this trial offer and because we were so sure of our quality of service, they came back to pay for more internet access time after the free trial elapsed.
Conclusion
The end of the matter is quite simple: if you don’t want to be at the bottom of the market fighting over prices with your competitions, then be prepared to raise the bar above the usual or general playing level. In other words, if you want to charge more, be ready to give more and do more!
Comments:
Excellent post (Linder, 29 August 2014).
