Operations

Publisher's Page: Price-Cutting Competitors?

Posted on November 1, 2003 by Sara Eastwood - Also by this author

Rather than attracting customers by taking in less profit and dropping price, try attracting customers by creating more value for your service or by operating more efficiently. That’s the key to competitive advantage – creating value for your service more cost effectively than your competitor is able to.

Unfortunately, most companies in competitive markets like ours are driven by a focus on revenue growth, which they pursue by trying to be all things to all people, rather than focusing on creating value more cost effectively. In the absence of competitive advantage, it is suicidal to drive growth with prices.

Think before you react to your competitor. I understand that it’s tough to stay cool when under attack, but you should never stop thinking rationally when threatened by a competitive situation.

By constraining your competitive reactions to only those that are cost effective, you will avoid making decisions that, in the final analysis, are not in your best interest. Here are four ways to reduce the cost of reacting to a price threat:

1. Create a “flanking” offer that is available only to the more price-sensitive buyer. This involves eliminating some element of service or amenity, or changing the type of vehicle – anything that is not highly valued by price-sensitive customers.

2. Focus your reactive price cut on a particular geographic area where the competitor has the most to lose. Remember, the purpose of the retaliation may not be to defend your sales but to get the competitor to stop the price-cutting that puts your sales at risk.

3. Make your competitor pay for its discounting practices. If your competitor limits discounting to only new accounts and doesn’t offer them to existing clients, it may be possible to retaliate without having to cut your own price. Retaliate by educating the competitor’s existing customers that they are being treated unfairly.

4. Identify your competitive strengths – such as highly qualified chauffeurs, newer cars or an outstanding on-time record – and use them to increase the value of your offer. You lower the value of your service when you match a competitor’s discounted prices.

Also, in the face of adverse competitive situations, think like Indiana Jones, not like John Wayne. What I mean is that this isn’t the movies and you don’t need to be a hero and fight to the death.

Indiana had the smarts to avoid confrontations unless he could structure them in a way that he’d win and the benefit from winning exceeded the likely cost. Or, he bowed out of the situation all together and ran.

And a final bit of advice. You should never initiate price discounts against your competitor unless you’re prepared for retaliation, and you should do so only after assessing that the retaliation is worth it in the long-term. Think before you act.

 

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