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Strategies to Win the War on Pricing
Do your reps insist that they need to offer discounts to close sales? Does your company endlessly differentiate its products in an effort to stay one step ahead of the competition? At many organizations, the answer to both questions is yes, even though A) those paths can ultimately drive you out of business, and B) the pressure toward commoditization is not a short-term, recession-related blip, but the new reality of doing business in an age in which products can be copied and discounted at warp speed.
The long-term nature of the trend toward commoditization calls for a strategy that goes beyond product differentiation and price slashing tactics that are no more than surface-level, temporary fixes that ultimately prolong the downward spiral, says Richard D'Aveni, a professor of strategic management at Dartmouth's Tuck School of Business and author of Beating the Commodity Trap. D'Aveni urges managers to instead take a more strategic approach to the problem by learning to recognize the most common commodity traps and understand the best ways to evade those traps. Here's a brief look at the three traps and associated fight-back strategies:
The Deterioration Trap. In this trap, prices go down and so, too, do benefits. The problem is typically caused by the arrival of a firm with a dominant low cost/low benefit position that attracts customers who care more about cost than expertise and service. The competitor gradually swallows market share while your margins and market share erode despite price cuts.
Solutions: Move upscale. Concede the low-end position to the discounter and focus on the high end, emphasizing exclusivity to clearly separate yourself from the low end. Or move away from the competitor by changing channels, time, or place (think Hill's specialty pet foods, sold exclusively through vets to avoid competition with such companies as Purina). A third option: Redefine your target segment and create products with primary benefits that fit that segment. If these solutions don't work, consider moving on.
"Sometimes companies exit from the market of a low-end competitor completely," says D'Aveni.
The Proliferation Trap. Proliferation occurs when "new price-benefit positions proliferate, surround, and erode a product's value proposition by targeting smaller segments of the customer base," says D'Aveni. "The dilemma for managers caught in the proliferation trip is that they cannot fight everyone, everywhere, all the time."
If your market is increasingly fragmented, and your value proposition is being undermined by new offerings targeted at ever-narrower market niches, you are likely caught in the proliferation trap.
Solutions: Target select threats and concentrate resources there - a position where there is little resistance, for instance, or one where you have some major advantage over your rivals or a growth segment where competition is lighter. Second, you can try to overwhelm the threat, either by using multiple strategies against multiple fronts or concentrating your resources on one universal strategy that addresses all the threats. Last, you can outflank the threats by using creative proliferation of your own.
"Find white space on the map or reposition to create new growth segments as old ones are saturated," says D'Aveni.
The Escalation Trap. Escalation is essentially one-upmanship, in which companies try to outdo each other by offering more benefits for the same or lower prices. "Customers get more and more for their money, and companies lose their margins," says D'Aveni. If you feel like you're constantly playing catch-up, if customers are demanding more for less, and if "yesterday's competitive advantage is today's entry stakes," you are likely caught in the escalation trap.
Solutions: Re-seize the momentum. Apple did this when its iPod, copied relentlessly, morphed into the iPhone. Geico did it by emphasizing branding and new distribution channels along with clever ads. Second, you can try to slow or reverse momentum by either freezing players' positions or elevating the entire line for the industry which can restore balance to the industry. Third, you can use the momentum to drive and control escalation, forcing others to keep up.
– Heather Baldwin
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