The definitive framework for responding to low-cost rivals in recessionary periods.
Business truism #1- The history of business is commoditization.
Business truism #2- There are two types of consumers: price-conscious and value-conscious.
In recessionary periods, many businesses reposition their offerings as a low-cost leader. The idea is to capture market share through economies of scale. Low price barriers for consumers should increase product adoption and accelerate the accumulation of market share. This strategy also bars competitive entry since the cost of entry increases relative to potential margin. As we learned yesterday, assuming velocity remains constant and potential margin decreases, the ROA for any new market entrant would be on a sliding scale. In the worst case scenario, businesses would be engaged in a price war, the outcome of which would be uncertain save for a decreasing ROA. Good for the low-cost leader, and bad news for the competition, right? Theoretically, this is sound.
The situation above is case that many of our clients are confronted with in this current recessionary period. So is joining the low-cost game the only way to remain resilient in the business climate? From our vantage point, our answer is a resounding "no". Sure, the history of business is commoditization (truism #1). However, we can't forget that there are value-conscious consumers (truism #2). This is a question of defining who your business's most valued consumer is and specifying what your value proposition is.
Beat 'em or join 'em? A framework for responding to low-cost rivals.
Understanding whether a consumer is price- or value-conscious is vital to crafting the marketing message. The following is a framework that we at The Boost advise our clients during the persona development process. This framework was developed by Nirmalya Kumar, professor of marketing at London Business School. It consists of three concise questions that require you to self-diagnose. Hope this will help you out should you be caught in the "beat 'em or join 'em?" conundrum.
Question #1: Will this company take away any of my present or future customers?
If "yes", then: Don't launch a price war. Increase the differentiation of your products by using a combination of tactics. These tactics should be integrated across all consumer touch-points both offline and online.
If "no", then: Watch, but don't take on the new rival.
Question #2: Are sufficient numbers of consumers willing to pay more for the benefits I offer?
If "yes", then: Intensify differentiation by offering more benefits. Over time, restructure your company to reduce the price of the benefits you offer. Focus your marketing on creating a brand experience that is integrated across multiple channels such as email marketing, pay-per-click marketing, and social media marketing. The differentiation is vital and must be consistent here.
If "no", then: Learn to live with a smaller company. If possible, merge with or take over rivals. The marketing roll-out should be carefully considered in situations like this. Co-branding, keeping the brands separate, or merging value props in one new brand are all viable actions.
Question #3: If I set up a low-cost business, will it generate synergies with my existing business?
If "yes", then: Attack your low-cost rival by setting up a low-cost business. Keep the marketing separate on both as to not confuse potential consumers.
If "no", then: Switch to selling solutions or transform your company into a low-cost player. Divest your marketing message to prioritize price-conscious attributes such as deep discounts and other various promotions.
So there you have it. A framework for self-diagnosis when low-cost rivals enter your market. Play accordingly.
Thanks for coming by,