What is the right course of action to take when a competitor undercuts your company’s pricing structure? Here are some ways to overcome lower-priced competitors without suffering major losses.
When a competitor undercuts your company’s pricing structure for products or services by offering them at a lower cost, it can present a serious challenge to sales, particularly because many firms are still operating at narrower margins in the wake of the economic downturn.
“It’s every company’s nightmare: a competitor enters your market with a similar product priced at a fraction of what you currently charge,” BNET explains. “You need a strategy for beating the low-ballers. So what’s the best way to proceed?”
It can be difficult to gauge the impact a competitor’s lower pricing structure may have on your own firm’s customer base, but devising a proper response first requires identifying the potential threat as soon as possible. In some cases, business leaders may be too focused on traditional competitors to recognize the emergence of a new, low-cost rival. This can be a costly oversight.
According to a recent study from McKinsey Quarterly, low-cost competitors “build momentum in slower-moving and more subtle ways — factors that established players might do well to pay closer attention to. At times, low-cost challengers build their presence stealthily by competing in undeveloped segments of a market. Or they can narrow capability gaps by tapping the look, feel and suppliers of bigger rivals.
“In other cases,” McKinsey continues, “competition between low-cost entrants can produce unintended second-level effects that escape the notice of incumbents until it’s too late to prevent a severe erosion of their market position.”
Although the most direct solution may be to edge your own prices down to remain competitive, this is not always a sound approach, particularly during periods when consumers are more cautious with their spending.
“On the one hand, all you need to do is drop your prices below the competition, and buyers will beat a path to your door. On the other hand, this approach will land you in a price war, and there are no winners in a price war — only survivors,” BNET warns. “Even if you manage to run your competitor out of business, chances are you may not have much of a business left when the battle is over.”
Unless you’re absolutely certain that your company can emerge relatively unscathed, it is critical to avoid a price war. In fact, lowering prices at all to compete with low-cost competitors may not be the best solution to the problem because establishing a lower-price formula tends to erode profits in the long-term.
A useful approach to overcoming a low-cost competitor without sacrificing profits is to shift customer perceptions about your product away from money and onto value. In today’s economy, consumers are more budget-conscious than ever before, but they may continue to spend on your company’s offerings depending on their perceived value of your product or service.
Whatever the price of your product, you have to present its usefulness as exceeding the actual cost. This requires building stronger relationships with customers through marketing, communication and a concerted effort to meet customer complaints — because these are what price objections actually are.
“Commit to the value proposition, don’t use lower price as a solution, eliminate the self-defeating thought that people aren’t spending anymore, and never treat a price objection as anything more than a complaint,” Entrepreneur.com advises. “Remember: When the value of your product exceeds the value of their money, you’ll get the sale.”
A separate Entrepreneur.com report provides other alternatives to improving value without lowering prices include: improving convenience through online shopping and in-depth information on products; building trust by providing staff bios, positive reviews and testimonials; and building a good reputation as a corporate citizen through community participation.
Management consulting firm A.T. Kearney offers the following suggestions for dealing with a low-price competitor encroaching on your market:
- Identify likely threats. The earlier a low-price rival can be detected, the less likely you will have to compete on their terms. Look for companies focused on reducing complexity or originality in product design to drive down costs, assembling products in low-wage markets or moving bulk volumes via low-cost shipping or distribution models.
- Conduct a total-cost analysis. Perform an analysis that compares what your competitor’s products or methods should cost compared with what they do cost in order to quantify the cost advantage. Next, try to see how that advantage translates into pricing options and whether or not they are sustainable (and can be replicated by your company) in the long-term.
- Explore all potential scenarios. Developing “what-if” scenarios can help determine the next steps in your response. Is your competitor planning to enter new markets, roll out new products or reposition itself to consumers? To forecast effectively, try to anticipate where the market is headed and which low-price companies have sustainable capabilities.
- Choose an effective strategy. The next step is to choose a goal that will improve the company’s operations and competitiveness based on the scenarios examined. “Often the better tactic is to shift the competition away from price alone. The newer rival may be less competitive in other areas,” A.T. Kearney explains. “Use product differentiation to appeal to customers’ needs for features or benefits they can’t get from the low-cost competitor.”
Differentiating between types of customers and learning which market segments your firm can afford to lose is another valuable, short-term strategy.
“[F]ocus on your more attractive customers and leave the less profitable ones to your new rivals,” A.T. Kearney recommends. “Not all customers are equally valuable. Some are prohibitively expensive to serve and draw resources that could be directed elsewhere for bigger gains. Let new rivals take these customers off your hands, so you can concentrate on the more profitable ones.”
How to Beat a Lower-Priced Competitor
by Geoffrey James
BNET, June 14, 2007
When Companies Underestimate Low-Cost Rivals
by Adrian Ryans
McKinsey Quarterly, June 2010
Get Past the ‘Budget’ Roadblock
by Grant Cardone
Entrepreneur.com, Oct. 29, 2009
Five Ways to Outshine the Competition
by Kim Gordon
Entrepreneur.com, June 15, 2010
Hitting Back: Strategic Responses to Low-Cost Rivals
by Jim Morehouse, Bob O’Meara, Christian Hagen and Todd Huseby
A.T. Kearney, January 2008