Dr Joern Meissner

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Meissner Research Group — Operations Strategy and Pricing Management Blog

The Exception in the Price War Story: Cost Leadership

April 28th, 2010 by Joern Meissner

Like every good rule, there’s always an exception. As previously noted, price wars are truly one-sided affairs. Your and your competitors’ prices falls due to a rush to gain market share, and in turn, the only victor is the customers who learn how to finagle every last penny out of your and your competitors’ remaining profits. But there is one time when using competitive pricing and having the lowest prices all the time actually works. This is called cost leadership.

Cost leaders are simply those companies who can set price based on their placement within the market share. They generally enter new markets by targeting the most price-sensitive customers, literally making their price their greatest attribute. By making their products cheaply and efficiently, cost leaders normally produce only the most basic of options, essentially a lower value option than what the larger (and greater market share holder) companies can make for the same price. By lowering the quality of their products, the cost leader can lower their costs while still maintaining their profits. This is how they can control the price during a price war.

The greatest market shareholders tend to have the advantage with everything but price, as a cost leader can come in and take away profits. Being a cost leader is an enviable position, because they can decide when to wage the price war and effectively win by drawing away customers from the market share leader. If your company already has a large market share, be wary of trying to act like a cost leader. With an already established brand, you can damage your reputation by creating products of questionable quality.

On the other hand, if your company is poised with low production costs, then perhaps you could be the cost leader. To do so, focus on your production costs versus overall return. If there’s a wide enough gap that you could drop your price below your competitors and still maintain a healthy profit – essentially the previously mentioned penetration pricing strategy – then you can become the cost leader. By doing so, your company is likely to not only gain profit but also gain market share and customers from your larger competitive who simply can’t match your price without losing profits.

Remember, price wars are a risky move for any company, but if your company’s profit and loss statements suggest you could become the cost leader, than perhaps it is time to try.

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Why there are no Winners in a Price War (other than the customer)

February 23rd, 2010 by Joern Meissner

In a price war, where competitors with similar products, designs, and incentives compete for customers by having the lowest price, the only person that wins is the customer. Always.

When allowing your sales staff to use price as their main tool to meet quotas for the month, week, or even year, you, as the executive, are actually making it harder for them to achieve the company’s goals. When competing on price alone, your customers will quickly realize that all they have to do is signify that some other company’s pricing is just a little bit better, and your prices will fall.

Don’t think this affects your bottom line? Not only will your profit shrink, there’s a good chance that if your sales team doesn’t have a bottom price range, the customers will manage to convince them that the only way to get the sale (which salesmen see as their one, main priority) is to dip below cost. Customer loyalty and all those other things the customer will promise your salespeople once that below cost sale happens will disappear the moment your competitor decides it is going to keep the war going.

So, playing the price war is a lose-lose situation for you, your brand, and your sales team, because your sales numbers may go up but your revenues will go down. You might even have happy customers – happy customers that will happily jump ship to your competitor with a lower price. Essentially, price wars are a no win situation, especially if you want to be at the top of your field.

Customers, especially in this recession era, have become very savvy at the pricing game. To them, only one thing matters in a market where everything else is equal: price. By choosing not to play their game, by pricing your products on value, your company can still win. While your competitors are eating away at their profits, focus your company on figuring out how to make your products different and worthwhile and showcase that value to the customers.

By pricing on your products’ value, your customers will realize the differences between you and your competitors. If you succeed in showing your customers a reason to pay just a little bit more, you can also create customer loyalty with a superior product. So instead of allowing your salespeople to empty warehouses below price, tell the rest of your company to create products and promotions that customers can actually see tangible value in. And avoid that price war altogether.

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