When a competitor undercuts your company’s pricing structure by offering products and services at a lower cost, it’s often your sales team that feels the pressure.
It can be difficult to gauge the impact that a competitor’s lower pricing may have on your company’s customer base, but formulating 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 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, 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.”
How to Deal With Undercutting of Prices by Your Competitors
Although the most direct and obvious solution may be to edge your own prices down in order to remain competitive, this is not always a sound approach, particularly during periods when consumers are being 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,” CBS MoneyWatch 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’s crucial to avoid a price war. In fact, lowering prices at all to compete with low-cost competitors and price undercutting may not be the best solution to the problem, as establishing a lower-price formula tends to erode profits in the long term.
To overcome a low-cost competitor without sacrificing profits, try shifting customer perceptions about your product away from money and onto value. Whatever the price of your product, you must present its usefulness as exceeding the actual cost. This requires building stronger relationships with customers through effective marketing and communications, and a concerted effort to meet customer complaints — because these are what price objections actually are.
An Inc. article advises companies to “consider what your customers care about most before making changes and updates to your business. For example, many value low cost when it comes to software, but some put more importance on ease of use. You learn such things by building strong relationships with your customers and investing in their needs. It’s all about pausing to understand the other person’s point of view.”
What to Do When Competitors Cut Prices and You Don’t Want to Reduce Your Own
An Entrepreneur.com report provides other alternatives, listed below, for improving value without reducing prices in the face of competitor undercutting.
- Improve convenience through positive online shopping experiences.
- Provide in-depth, helpful information on products.
- Build trust and customer loyalty by providing staff bios, positive reviews, and testimonials.
- Form a reputation as a good 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 actually cost in order to quantify the cost advantage. Next, try to see how that advantage translates into pricing options and whether they are sustainable — and can be replicated by your company — in the long term.
- Explore all potential scenarios. Developing a few “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 your company’s operations and competitiveness based on the scenarios examined. “Often the better tactic is to shift the competition away from price alone,” 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 are other valuable, short-term strategies for dealing with a competitor’s undercut price.
“Focus 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.”
Preparing for Success
Developing a plan for what to do when a competitor undercuts you can be hugely helpful in saving both time and money in the long term. Taking the time to plan ahead, and keeping the above tips in mind as you do, will assist in navigating these stressful situations, allowing you to remain competitive and agile in today’s ever-evolving industrial landscape.
This article was originally written in 2010 by Ilya Leybovich and was updated in 2022 by the Thomas Team.