What to Do When Competitors Undercut Your Prices
November 9, 2010
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
- 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."