| When competitors cut their prices the temptation
is, of course, to cut yours too. But that sort of behaviour can quickly turn into
a price war. And while that might be good news for customers in the short run,
unless you actually want to throw away your profits, it certainly won't be good
news for you.
It has been estimated, for example, that the losses
caused by the 1992 US airline price war were greater than the combined profits
made by the entire industry since it started!
And it probably won't be good news for customers
in the long run either, since price wars often force smaller companies out of
business (Sir Freddie Laker's airline for example). So, with less competition
than before the price war, the survivors (often the large companies with deep
pockets - like British Airways) start putting prices back up again. Sometimes
to an even higher level than they were before the price war!
Clearly it is in everyone's best interests to prevent
all of this happening. But how?
Firstly an important reminder of something you
shouldn't do... You shouldn't agree with your competitors to keep prices high
- that is anti-competitive and might also be illegal.
Happily, though, there are still many other things
that you can do. And here are a few of them.
In the late 1990's a combination of economic instability
and terrible pollution hit the Malaysian luxury hotel trade very badly indeed.
Room rates were cut, but occupancy rates kept falling, so room rates were cut
further still. And to help balance the books many hotels started to economise
by, for example, changing the towels less often, using fewer fresh flowers and
cutting back on staff. One hotel chain - The Ritz Carlton - didn't join in the
price war. Instead it became creative. For example it:
- Greeted arriving flights with flowers, music, discount coupons and a model showing
how lovely a room at the Ritz Carlton really is
- Put the General Manager's personal mobile phone number in advertisements so
that people could call him directly to book rooms
- Provided a 24-hour "Technology butler" service to sort out and repair
guest's laptops and other electronic equipment
- Created a "bath menu" of food and drink that could be served to customers
while they were in the bath - and even provided a butler to run the bath!
- Gave a beautiful hand embroidered pillowcase to guests staying more than five
nights
As a result many executive travellers switched
to the Ritz Carlton - even if they had already organised a room at a rival hotel.
Occupancy rates increased to 60% (from 50% in 1998). And, unlike many other luxury
hotels, their brand wasn't devalued by a sudden influx of backpackers unable to
believe their luck at getting luxury rooms at economy rates.
What can you do to make your product, or the experience
of using it, so much more valuable, enjoyable and memorable?
If you are not sure, ask about the Wow! How? process.
It's designed to help you dazzle and delight your customers in these sorts of
ways.
Here's a fact,... people use the price of something
to help them judge its quality. So use this fact to your advantage by saying things
like:
- "I am sure that they know the value of their widget just as well as we
know ours. And that's why our widgets are more expensive than theirs"
- "There's no such thing as a free lunch, is there? So if people are cutting
prices they are going to have to balance the books by cutting other things too,
aren't they? And that could mean cuts in things like quality, reliability and
after sales care, couldn't it? You wouldn't want that, would you?"
In fact, FedEx's entire business is based on this
phenomenon. After all, the slogan "When it absolutely, positively must be
there on time" is effectively saying... "There may be someone cheaper
out there, but you don't want to run the risk of your package arriving late, do
you?"
How many different and creative ways can you help
your customers understand (and then continually but subtly remind them of) the
risks of going for the cheap option?
Instead of giving price cuts away, make the customer
work for them. For example, you could:
- Turn the price cut into a quality discount - eg "The price is £Y,
but if you buy three you can have them for £X each"
- Convert the price cut into a settlement discount - e.g. "The price is £Y,
but if you pay within 7 days you can have them for £X each"
- Use the price cut to sell a complementary product - e.g. "The price is
£Y, but if you take out our insurance you can have them for £X each"
- just as travel agents do
- Trade the price cut for a commitment - e.g. "The price is £Y, but
if you make us your preferred supplier for the next 12 months you can have them
for £X each"
- Trade the price cut for sales leads/referrals
In the early 1990's a raft of cheap floppy disks
came onto the market. But instead of cutting the price of its premium branded
disks, market leader 3M launched a new low priced brand called "Highland".
So while Highland got on with the job of competing on price, the many customers
who were loyal to the main 3M brand continued to pay premium prices. So 3M were,
in effect, able to charge two prices for the same product. In other words, they
were able to have their cake and eat it!
How can you create lower priced versions of your
existing products? Remember, they don't actually have to be different from your
existing products - they simply have to look like they are different!
You have probably seen this in supermarkets. They
proudly announce price cuts on staples like bread and milk... but leave the vast
majority of prices unchanged. As a result they look like they have cut prices
by more than they actually have.
The best products for this strategy are those in
one or more of the following categories:
- High profile products- since they will attract a lot of attention
- High margin products - since you will still make money after the price cut
- Products where sales are already low - since they can't damage your total sales
too much
- Products that are extremely price sensitive - since you could end up selling
a lot more
Which of your products fall into these categories,
and how can you use them to score the most brownie points?
Here's a piece of flawless logic: if the problem
is that customers are comparing prices then you can remove the problem by making
it impossible to compare prices. But how? Well, here are a few possibilities:
- Don't publish price lists - Agree prices behind closed doors (NB: In industries
where price lists are not the norm, companies who do publish price lists can gain
a tremendous advantage - so clearly this is not a universally suitable approach)
- Ask customers not to tell anyone how much they paid - But you will probably
have to make this worth their while, and you will also have to check the legal
position very carefully since it could be considered anti-competitive
- Create lots of different models - Have you ever tried comparing the prices of
washing machines and fridges in different shops? It is frequently impossible because
each shop sells slightly different models (although usually the differences between
the different models seem to be little more than cosmetic).
- Introduce very complicated pricing structures - This is what the UK mobile phone
companies have done to make it almost impossible to compare different airtime
tariffs
Instead of cutting prices, maintain or increase
them. But also bundle in extras that most customers don't already buy. Extras
that have high value to the customer, but low cost to you.
This is what McDonalds did when faced with stiff
price competition in the 1980s. By bundling in a drink and fries with its burger
it created "Value meals". Price conscious customers could then buy the
bundled value meals (often spending more money than they used to - but being happy
to do so because they were getting much better value). While customers who weren't
so price conscious could continue paying the higher prices for the unbundled items.
Clearly this strategy works - since McDonalds still
uses it today! So what could you bundle in to make your existing prices much more
attractive to customers?
Finally, make sure your competitors know
that your variable costs are very low. Make sure that they know that you have
the capacity to supply to their customers as well as your own. And, in a non-confrontational
way (for example, by writing an article for the trade press), make sure that they
also know that if they cut their prices, you could use these factors to steal
their customers by cutting your prices even further. That is what Sara Lee does
- and the implicit threat has helped it (and many other businesses) to prevent
price wars. After all, when competitors believe that they can't win, they won't
even try to win. And so the price war will never happen.
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