Competition and Pricing Responses

 Competition and Pricing Responses

Practically every business faces this problem particularly when you don't have any monopoly situation prevailing for most of the businesses. As a marketing consultant in the early days and later as a management consultant advising on the business process improvements for medium and large businesses, this was a major issue which required to be addressed for most of my clients.

I remember once I was asked to address a team of field sales people by a large consumer marketing company which was nationally distributing high brand value and relatively high priced products. During the sales conference all the salesmen started complaining that since their products are priced high in relation to their competition, they were finding it difficult to meet their sales targets. The sales manager who had asked me to address them had also briefed me on this problem and took my help in making the sales people understand how to position high brand value with high quality in the minds of the customer and use it as a selling proposition to realize high prices demanded. 

The easiest response when faced with competition is to drop the price. That is a lazy mind response from a marketing manager or the management. And like your product it is the easiest response to copy by any competition. And it ends up in bloodying the battlefield for every one. Similarly giving gifts and incentives as sales promotional tools help in the short term but again the schemes can be easily copied and bettered and the net result is another set of bloodied battlefields.

The basic premise of my advice to management is never to compete on price but find ways to add value to customer experience of owning your product or service which creates value perception beyond costs and let everyone focus on communicating this value proposition to sell your desired price. Every marketing research and our own experience shows that no one remembers the price but everyone remembers a bad experience.

Let me explain with some real cases. All of us are familiar with how large companies try to beat competition with price drop. This was a response one of my clients wanted to use to prevent a competitor from getting a toe hold in their respective customer base. At this time we were doing a Business Process Reengineering exercise for their complete supply chain management from procurement to order fulfillment and as part of the exercise we along with their team met many of their customers to see what they were looking for from the client in terms of value. In practically every case we got two major feedback. One, the client should improve their delivery performance and two, there were some product quality issues which they had raised especially during monsoon season and they would like that to be addressed. When our team specifically raised the issue of how important the price dimension is, they said that they value only the two issues more than price. If the client cannot deliver on time and deal with the quality issues then they will look for another vendor based on price.

Recently I had to help a small business unit referred to me with a marketing problem. They wanted to add more customers and found that wherever they approached a prospective customer there prices were higher than what some competition was quoting. They were not sure why their new prospects would even consider them for a trial when they are priced higher. After looking at all the issues connected with their costing it was coming out clear that all competitors who were quoting lower prices could fulfill those orders with such low prices only if they compromised on the specifications.

I advised the client that while all customers won't be concerned with such specification compromise there will be some potential customers who would be bothered about such matters and suggested that they discuss with the end users of their prospect companies to influence the purchase department on the need to maintain specifications of supplies. When the trial order was placed in all such cases my client unit did not have any problem with the approval with such customers and those who had quoted lower prices and delivered had their supplies rejected on non conforming to specs. Caught with this dilemma the purchase managers had no choice but to focus on my clients for regular supplies and did not make a big fuss on their prices. To bolster their case further I suggested that they show their complete costing to the customer to establish the integrity of their prices.

In a matter of six months they were able to add a dozen new customers to their existing customer base. More than that this also gave them the confidence that while trying to get a new business the focus should be on what is of value to their customer. In some cases along with quality just in time supplies become more important. And if you find ways to reduce cost then this lower cost can be used as an advantage to reduce prices if needed without compromising on quality and service.

Recently we have been experiencing severe competition in all major business sectors. Unless you are still in a business where shortages are endemic or it is controlled by a licensing regime, all this competition has an impact on prices. Such competition also forces companies to find ways to cut costs. I have found that such attempts are fraught with danger since costs cutting measures can also lead to reducing the ability of the organisation to serve the customer better. Thus instead of getting more customers by reducing costs the organisation can lose customers arising out of bad service or other aspect of value to customers. Some time back a computer dealer mentioned this dilemma he faced. In order to match competition at the time of selling all dealers were quoting below cost price to get an order. But they started asking customers to pay for all after sales service at additional costs to make up for their sales loss. Moreover many of them stopped giving on site service insisting that you have to send the computer back to bench for any service problems. One can imagine what happened to the poor customers who while gaining at one end lost heavily at the other end. And as a user of a computer we all know how important a good service support is.

While competing on price cannot be avoided if one can find ways to ensure that such prices do not lower the value delivered to the customer then it will be useful. How does one achieve that? Many management gurus advise us that when you run a business the reason for its existence is the customers. Hence what is good for your customers is good for you. At the same time it is the people in the organisation who do work to deliver that value. And if these people follow the right processes which are designed to deliver that value then competing on price can be made very profitable for all concerned. I have found that creatively adopting concepts like Business Process reengineering, Lean Management and Theory of Constraints we have been able to help many organizations compete effectively while improving business performance. The size of the business is not an issue, it is the commitment to creating customer value and a leadership willing to back this commitment which made these organizations compete effectively.

Finally, can we avoid price competition at all? The answer is no. But as is happening in many technology driven businesses if you can find ways to add new values and features which did not exist before then you can find ways to relaunch or reinvent your product or services at much higher prices than prevailing before. The case of mobile phones is a good example which everyone can understand. But in many industries it is possible to to realize higher prices by adding more values to your offering there by reducing the total costs for the customer. In the case of a packaging manufacturer, we advised them that instead of simply supplying the packaging material where the price competition is severe they should handle the last stage of packing and shipping for the customer and charge based on per unit shipped. Thus instead of getting paid for per unit of material now they got paid for shipping per unit of the customers product. The value price realised was an order of magnitude several times the unit price of the material. But one of the un-intended benefits was they ended up completely eliminating any competition for their packaging material business with these customers. Similarly in the transport business we found that many goods transporting companies moved away from a highly price competitive goods transport business to third party logistics management business focusing on inward and outward supply chain management including cash management services to add value to their clients business at higher unit price realization. 

So my mantra is don't compete on price as a cost but compete on price as a value experienced by customers.