Price Theory: What To Do In The Face of New Competition
Price Theory: What To Do In The Face of New Competition
When a new direct competitor suddenly appears, the temptation can be overwhelming to compete against the interloper on price. Much has been written as to why this is always problematic, most notably that it attracts price‑sensitive customers who do not develop brand loyalties, and it does nothing to build your own brand. Nonetheless, there is a more subtle and dangerous issue:
The view from the middle
Imagine two products: your Brand Y and a more-upmarket Brand Z. Then, Brand X enters the picture and it is positioned directly against you. If you react by lowering prices, you not only denigrate your brand equity, you inadvertently thrust Brand X into the middle price position. And as most shoppers gravitate toward a middle brand, feeling it is the best compromise between price and quality, you have inadvertently given your new competitor a positioning advantage—and he will not even thank you for the favor.
Another consideration: unless you simultaneously change your operational structure to reduce cost at every level, slashing prices only squeezes your margins, leaving you less flexibility to react to other economic pressures. Besides, if such draconian changes in manufacturing, materials, inventory, and distribution were possible, you would have already made them, correct? And if not, doing so now, only to fritter away the savings on price reductions, just speeds the ascendancy of Brand X into the middle price position, which is exactly what you want to avoid.
The view from the top
Much the same holds true if your brand is the upmarket one and Brand X endeavors to compete against you there. Price reductions and discounts are anathema to brand equity in the premium segment, even more so than in the middle tier. Also, competing on price tacitly affirms the upstart’s advertising: that his Brand X merits the same upmarket status as your Brand Y. Worse, noting your prices are lower than that of Brand X, consumers might emotionally demote your offerings to the middle segment, wherein your prices will be the highest in a more price-sensitive environment, forcing you to compete in an unfamiliar niche that requires thinner margins, greater economies of scale, and perhaps an entirely different corporate culture than the one you happen to have on hand.
A change in landscape
In either of these two scenarios, trying to meet or beat the prices of the new competitor effectively repositions your brand to his relative advantage. This is not good. Better would be to acknowledge that the landscape has changed and to have a proactive marketing strategy that positions your competitor where you want him. And you can—by identifying what you do best, doing more of it, and advertising it.
How? Check out Starbucks
Faced with an aggressive new competitor, your first course of action should be a close reexamination of your points of differentiation. Historically, the phenomenally successful Starbucks Coffee Company got that way by providing a unique experience that surrounds its premium prices and potables. In any city, when faced with any one of its zillion imitators, Starbucks doesn’t respond by matching price. Advertising on price would de-emphasize the self-consciously bohemian image the company has carefully brewed for itself, which is its chief point of divergence. People would wonder, if it is all about price, then why not get my morning fix at the local McDonald’s?
Once you have examined your point of differentiation, the next step is to fortify it against the competition. Say you are a retailer offering both sportswear and eveningwear, the latter being the more profitable. Now is the time to upgrade the look, feel, and positioning of your eveningwear brand by adding value to it wherever you can: in the buying experience, the amount and quality of your advertising, your brick & mortar presence, and by upgrading the product itself. This would also be a good time to introduce exclusives, or a premium sub-brand that is even further upmarket, much as Visa® did with the introduction of Platinum®.
Where will you find the resources to do this?
First, by gently raising your eveningwear prices as you add obvious value and upgrade your offerings, even if your margins are temporarily pressed. While this might seem counterintuitive in the face of new competition, it is nonetheless a curious fact of life, called a Giffen Good, that price qua price is a primary factor in establishing brand value and relative exclusivity. If this were not true, everyone in the front office would be driving a Toyota instead of a Lexus.
Second, you should divert some of your profits or resources from your sportswear line to your eveningwear brand. (Interestingly, a typical mistake would be to do just the opposite: shoring up the sportswear brand by draining off profits and resources from the more‑successful eveningwear, resulting in two underachievers instead of one.) Whatever brand equity you might temporarily put at risk for your sportswear will be more than offset by the increasing halo effect of your eveningwear. The strategy for your sportswear then becomes one of brand extension.
Never wrestle with a pig
In sum, beating or matching the prices of an upstart competitor who is imitating your brand is a reactionary struggle that confirms his pretensions toward your market position in the eyes the public. Or more colloquially: Never wrestle with a pig. You both get muddy—and the pig likes it. The wiser course is to identify proactively what you do best, do more of it, and tell the world about it.
Stephen G. Barone and Susan H. Dineen are co-principals at barodine marketing communications & research.
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