A strategy where you mainly compete on price has little going for it, except that its pretty quick and easy to alter. Its also pretty easy to copy, be undercut and set new lows for the market you are in.
Being the lowest price when you have worked hard to achieve the lowest cost is, on the other hand, highly strategic. This is rarer.
Often a low price strategy just means a low margin strategy and just like those extra drinks last Saturday night with good friends, there is often a hangover to follow.
Australia has been a happy hunting ground for low price leadership
Officeworks lowest price guarantee or they’ll beat it by 5%
Bunnings goes one better and their price guarantee and will beat an identical item by 10%
Chemist Warehouse – ditto
Coles “down down” campaign and feed your family for $10
IGA price match promise to match the lower price on 100s of Coles and Woolworths items
Harvey Norman’s ‘shop with confidence’ Price Guarantee to match competitor’s prices
Even Myer has a Competitive Pricing Policy with price matching
What about B2B companies? Anyone out there have a sales force constantly saying if only they had a lower price they’d be able to increase sales? Any of you wondering if you can increase sales by dropping price?
There have traditionally been three ways to win in business.
Have the best product
Have the best customer experience
Have the cheapest price
But just as if there was some cosmic force working against you – it’s never been possible to be all three. In fact, for the many who have had a tilt at the trifecta, it hasn’t ended well. (Dick Smith being a case in point.) Aiming for all three lends itself to that white ice-cream flavour, that off-white wall-paper colour and the taste of Tofu. Vanilla, Beige and Bland ain’t no winning strategy.
Turns out that great service and great products raise costs which make low prices hard to sustain. Who knew?
The Tofu strategy also leads to some self delusion of your true value. If 80% of websites claim great products, great service and value for money – they can’t all be right. It’s a bit like asking 50 individuals anonymously if they are above average – most would say they are, but 50% must be wrong.
Australia is fascinated with low price, but just as its easy to change your pricing and NOT easy to provide the best service or the best products, that makes it easy for a competitor to take your ‘strategy’ away from you by dropping their price below yours.
Perhaps that’s one of the reasons why our retail sector is so battered and bruised. If they keep telling us its all about price, then we’ll just order it online, its cheaper; and if its not cheaper, its more convenient. If I go to a supermarket to get my groceries I provide the labour and the transport – which is really just time. If I get it delivered, the retailer pays people to pick and pack the product and delivery drivers to bring it to me as well as the truck costs. This cannot end well if you fight on price and don’t have lower costs?
If it’s about price,
what happens when Amazon comes to town
and doesn’t target making a profit anytime soon?
What happens if their delivery ends up faster? What happens if they have an offer like Amazon Prime Wardrobe where you can get clothes to try on delivered to you for free, and then you can have them picked up for free if you don’t want them?
Lowest price without the incredible amount of work it takes to be lowest cost is just a weak, flawed and lazy strategy. Far better to have the best customer experience or the best product and then charge for that. But that requires a thinking strategy. The rest, meantime, just have low margins to match their low prices.
We will paymore when we get something in return.
People moved from free to air TV to Pay TV and then to streaming – and pay for that
People pay for bottled water when they can get it out of a tap for free
People buy Himalayan Pink salt and salt from the dead sea instead of from Geelong
People still buy books when eBooks are a fraction of the price or free
People go to cafes and pay up to $5 for a coffee when they could make one at home for under $1
Clearly these people are getting value to pay more.
Is there a more elegant solution? Is there a secret weapon? Is there a way to change the rules and be better, cheaper and faster at the same time?
Disruptors often change the game by changing the prevailing business model of an industry. And when they do that – they sometimes get to be better, cheaper and faster for a while until others catch up. And that can take a decade.
Many people think Uber is better, cheaper and faster
In 1997 Netflix delivered DVDs by mail in the US so their subscribers could watch 17 movies a month for $10
Its cheaper to pay $10/month for unlimited music than it was to buy CDs or pay Apple’s $1.19 to $2.19 a download
Parkhound can save you money on a city park
Google Maps beat having a Melways
If you want to disrupt your market, think about adopting any of these business model trends
Can your service business create a digital product? If not can your marketing, your service or your client education be more digital?
Can you adopt a subscription model for unlimited usage? Or tiered usage?
Can you change the location where your customers buys? (Don’t go to the video store any more)
Can you change to a rental revenue model instead of an ownership transaction?
Can you be paid for introducing two parties in your industry (the eBay, eHarmony, iSelect model)
Can you create a membership community of like-minded people and make money from advertising (Facebook, Linkedin)
Can you change the experience for the customer by providing new insights, data analysis, industry trends or best practices as a service (eg predictive maintenance via sensors)
If you wholesale, can you manufacture? If you manufacture, can you service? If you retail, can you wholesale (now flip them all back the other way)
Can you charge for outcomes instead of time? or charge for time instead of outcomes?
Can you charge a fixed rate instead of a variable rate or vice versa (eg Purplebricks real estate)
There are many ways to new growth and many ways to attract, retain and please customers with new business models for your industry. Doing it via Price, if you have no cost advantage, or majoring in the Tofu strategy are the least imaginative and the least successful.