Product Management Library of Knowledge
Pricing Tips to Compete with the Irrational
Pricing Tips to Compete with the Irrational
by Therese Padilla
Part I of a 3-part series
I once asked my business unit director, “how can we deal with our stupid competitors?” Now before you start thinking that I was afraid of competition, that was not the case. (In reality, I am a fierce competitor and steep competition makes me a better product manager.) I am talking about those companies who aggressively drive prices down to keep a piece of business. You know, the ones who believe winning volume means dropping prices below cost. During the late 90's and early 00's it was called, 'customer acquisition'. Eric Gagnon calls it the 'great wealth transfer'. No matter what you call it, I call it 'stupid competitiveness'.
At the time, I was referring to my competitors who were offering 10 year corporate licenses at single year prices and offering $0 net cost rebates at retail. If this sounds like your experience, then you have irrational, stupid competitors. Why are these companies so stupid? Most of our competitors were responding to shareware competition. These were products that performed well, but didn't offer a lot of extended value.
So what was the answer? It wasn't as simple as gobbling these small shareware companies up in acquisition sprees or 'market consolidation' strategies. (Although, that was the strategy employed by our most aggressive competitor.) The problem, my boss said, was our own perception of the pricing issues. When confronted with competitive moves that seem “irrational” he suggested the following tips to keep pricing on track.
Have clearly identified targets.
If you have targeted every potential customer in the same manner, it’s likely you are targeting customers with high price sensitivity. The minute you price to win these customers, you increase customer price sensitivity and competitive intensity. Focus targeting efforts only where you can profitably win.
Target segments that deliver differential value or competitive advantage.
If you select customer targets based on your ability to deliver unique value, you create a significant competitive advantage. If these customers are firmly entrenched in your competitor's camp, you can expect severe retaliation. To paraphrase Thomas Nagel; profitably winning business depends on pricing for differential value and delivering that value cost effectively.
Meet customer requests for lower price by reemphasizing your value proposition.
Once customers settle in, they may not perceive (or completely forget) your value proposition. Remind them. Otherwise, customers will price shop you against the competition, despite the fact you deliver more value.
Have clear communications targeted at competitors.
Say what? It works like this. If competitors know where you are headed, they are responding to your every move. Use market communication to get the word out on your strategy and force the competition to respond.
Avoid pricing down to grow demand in mature markets.
Price sensitivity is high and demand is inelastic in mature markets. Price cuts here will not grow demand no matter how low the price drops. Sometimes, price cuts may buy some volume for a short time, but at your company's expense. You can also expect retaliation from competitors who will jump into a price war. This action will quickly erode any short term gains.
Adjust operations based on economic conditions.
As demand slows, adjust your sales forecasts to match these levels. If production and sales quotas remain high, while demand drops, pricing wars will likely break out. The results will be loss of focus of long term efforts. The only way to maintain pricing above competitors is to deliver value competitors can't match. This is a very good strategy in any economic or product life-cycle condition.
Use discipline in approaching target customer segments.
corollary: refrain from pursuing customers not in target segments
Pursue customers you can profitably win; let competitors go after customers you can’t service profitably. Of course this means you’re not going to win the entire market. You can’t win an entire market without killing your profits.
Did you buckle to meet competition? Then lower the value in exchange.
Once you have opened the flood gates of lowering prices to meet competition, hold firm on the value exchange. When a customer wins price concessions from you without having to give up value, you've immediately created price sensitivity. Customers will continue to demand price concessions from you. Even worse, they’ll take your price concessions to your competitors and insist they meet them. What ensues is a classic price war.
Once you have become irrational in pricing, competitors will be forced to compete on pricing alone. (Unless of course they follow these simple guidelines). Remember, force customers who demand price cuts, to accept value cuts as well.
Make competitive initiatives with long term perspectives. Develop non-pricing competition.
Force your competition to your level of superior value. Look at the product's profit potential several years down the product life-cycle. If it is a short term market, plan accordingly.
How effective was this advice? Extremely effective. Despite competiting heavily with low-ball pricing, our company continued to grow and posted the best margins in the field. The caveat: in order for this plan to be effective, it must be adapted at the highest level of the organization. From the CEO to the sales force, communication of the mantra 'deliver value above no-profit pricing' has to be clear. A company that feels good about only losing $1 on each product they sell because they are making it up in volume is a stupid competitor.
Part Two: 'Pricing - Selling Value in a Wal-Mart World'