What Happens After You Lose On Price
Written by Costas Papaikonomou
The following story is true for any business enviroment, whether it's CPG/FMCG, B2B, services, software, anything. It is most true for industry leaders. This is about your bread & butter having become a commodity and you being on your way out of business.
When you lose on price, you are in fact experiencing the consequence of something that happened much earlier and you're probably in even more trouble than you are aware of. What may appear like a stroke of bad luck could well be the sign of a deeper, more structural problem.
Of course, Blue Ocean Strategy and The Innovator's Dilemma have covered similar territory (read the books, they're great). Yet I wonder if there's not another side to their story. Imagine the following snapshot - or re-live it because there's a significant chance you've already experienced it 'live'.
One of your customers has chosen to switch to a competitor's product, effectively taking a large chunk of your business away. A chat in the hallway of your company may then well sound like this:
A: Dude, why the long face? What's happening with that big [client] contract I heard you were bidding for?
B: Not good, it's over. I just heard we lost to [competitor]. A damn disgrace after 5 years of good business with [client].
A: What, you mean [competitor]? The amateurs who've been knocking off bad copies of our [product]?
B: Yes, the &*$)$@£ b**tards undercut our proposal by almost 40%. There was no way we could match that.
A: But their quality is appalling! I thought [client] was anal about quality?
B: They were, but not this time.
A: Surely that will get them in trouble, there's no way [competitor] can produce anything close to our standards. Our quality is FAR better, make that GALACTICALLY better than theirs.
B: I know, I know. Of course [client] will be back in six months, but that's still a lot of revenue gone. Not to mention my bonus.
A: Yeah, they'll be back. You just wait 'till they've really experienced the importance of quality when it comes to [product].
Feel free to insert you own favourites for [client], [competitor] and [product]. What has gone so wrong for these poor people? What to do now? Well, depending on who you are (or whom you ask), you may be considering one of the following:
- You're confident [client] will come back soon, so you'll just lower capacity for 6 months, fire some folks in manufacturing and wait.
- You consider manufacturing more effeciently, invest more in Six Sigma, Lean and DFE to get that cost down.
- You'd rather lower your margin to keep the business, shareholders never have enough anyway.
- You could lower your quality standards and simplify your manufacturing process.
- You now have time to improve quality even further, making [client] return even sooner.
- You spend the next twelve months planning a hostile takeover of [competitor].
- You put your R&D at work to develop [product]-LIGHT, the cheap alternative.
- You'll take [competitor] to court for infringing copyrights or patents.
There are many more things you could do, the problem is none of them will do you much good unless you start repairing some of the damage done way before you lost this contract. So here's another way of looking at the situation, which highlights your real problem.
Imagine you are now [competitor] and you're celebrating your first win over the industry leader. You proudly stroll through your rickety old factory where you've been knocking off countless copies for years, shaking hands as you go around. What are you going to do with this new revenue stream you've just secured?
- Buy a Ferrari, build an extension to your condo and finally take that holiday to the Bahamas.
- Invest in new machinery and get rid of the old crap you used to call assets.
- Put a quality control system in place, because you know [client] can be a little anal.
- Hire a colleague for your lonely engineer and get them to work on [product] v2.0.
- Hire a production manager, a marketeer and a sales director, to free up your time for chasing more [client]s.
Obviously everyone should do something fun and silly like that first point, but as long as they back it up by one or more of the others they can only win. They simply re-invest. They are on the first step of a tricky (but rewarding) road past the original industry leader(s). They already know how do produce efficiently, they're not burdened by the hassle of developing from scratch and they operate in a mature market well developed by the leaders. According to Blue Ocean Strategy that was a bad place to be... well, that's not so true if you're the underdog. There's a wonderful example in this Dutch newspaper article from June '09 about Chongquing (©2009 NRC). As one of China's new megacities, it has a population of 32 million, of which 100,000 are entrepeneurs. The article covers two stories, one is that of mr Yin Mingshan. He started is motorcylce business Hongda (yes, he had nerve) in the 1980's, knocking off copies of indeed, Honda. His break came in the early nineties, when he was allowed to export out of China. Soon Africa and the Middle East were all buying his cheap motorcycles. This allowed him to upgrade and move up into manufacturing cars. Now, he's investing in factories in Peru, Algeria and Iran. He's developing his first hybrid and he's attracting foreign investors, including Americans.
Now this is not a pamflet to promote counterfeit products. The point is that when enough businesses start copying the success of an industry leader, legally or illegally, at some point some will be smart enough to surpass the original. Look around and see how virtually all current industry leaders started as the underdog. Whether it's Google, Reckitt Benckiser, the iPod+iTunes, mr Mingshan's Hongda or the whole of Japan, they all started in mature markets with big industry leaders. But without the burden of having to invent a wheel.
So where does that leave the current industry leaders? Is there no hope? Up in the ivory tower of quality premium goods, looking down onto the bogs of low-cost copy-cats, they can become overly concerned about keeping the tower intact. That is indeed hopeless. The trick is to realize how to modify the tower.
Firstly, you can make your tower taller. Evolutionary innovation. Easy and rational as that may sound, many brands and businesses get this as wrong as the example at the top of this page and end up losing to [competitor]. Evolutionary development is usually not about making your product better at what it already does, the performance or quality pitfall. After a couple ofyears, it's probably good enough already. Nor is evolutionary innovation about adding feature upon feature. This is 'The Innovator's Dilemma': are 7-in-1 dishwasher tablets really 7x better? Your market probably likes the features already. Good evolutionary innovation is about adapting your features to the changes in your market, acknowledging shifting contexts and making small tweaks to accomodate for them. This requires patience and restraint, simply not to run ahead of your market's needs. Like the athlete Sergey Bubka, who beat the pole vaulting world record by a centimeter at a time, for 35 centimeters. He could leapt it all in one go, but then his sponsor would only have paid him once.
Secondly, you can add branches to your tower: brand stretching or line extensions. This is trickier than the previous as you have an even bigger risk of running ahead and losing connection to your core brand or product, alienating the market that loves your product. There are plenty of reasons imaginable for branching out, though it makes more sense to aim for a new group of users rather than the friends you already have. Keep friends with the small incremental evolutions from the previous paragraph.
Thirdly, you can exploit the view and look for other towers. Game changers. New markets where your proposition would in fact be the underdog, but one that can provide a smart solution to conundrums your original market has already dealt with. Mature markets with a flaw they weren't aware of, yet. Most often the flaw is a poor price/quality ratio, which is exactly what [competitor] is doing to your business right now. The many examples from Blue Ocean Strategy (Yellow Tail, Southwest) play this key conundrum. The oceans are blue but not empty (a common misunderstanding), entering these will almost always involve tearing down competing towers.
Last but not least, you can create a new market and a new business, with all its opportunities and risks. That's probably happening in a shed next door to your company right now and unless it's your own skunkworks, there's really nothing you can do. Choose one of the other three first.
In the end it's quite simple - when others start moving IN, you need to plan moving ON, or they will catch up with you.
©2009 Costas Papaikonomou
Examples of what you talk about are all around us -- as soon as an idea succeeds, there spring up dozens of copy-cats.
But may I pick up on a topic you just mentioned in passing? Mature markets... Interesting indeed! There's not much fun in marketing a slew of luxury shower products in sub-Saharan Africa! (Or is there?)
How is it possible for even bushmen to recognize coke (besides the iconic scene of a coke bottle hitting a bushman in the movie, "The gods must be crazy")?
(Now we move on to SCM -- Would it be possible to co-opt locals say in sub-saharan Africa to involve themselves in joining the value chain (that is the supply chain)?
When a market leader (in the Pepsi Vs Coke battle in Africa for instance, Pepsi took a beating from Coke and only now are they emerging with their crisps marketing) co-opts a mature market (the key term here is "mature", for this wouldn't work in immature markets. For instance if Coke were to try and market their products in some remote chain of islands they might succeed beyond their dreams, but their success wouldn't last for long. Because Pepsi would then launch a counter-attack by marketing their own stuff and replace Coke in those territories!).
However, in a mature market, the market leader has unassailable market share due to brand loyalty and related promotional activities.
So, how does the firm that is trailing behind the market leader catch most of the market share? People do think that more "innovative marketing" such as a blitzkrieg of TV commercials (in football crazy sub-saharan Africa David Beckham in the commercial was expected to do the trick) will do the trick... They forget that such a promotion would just enable them to just keep running in the same place...
Let me give an example. In India the market for pasta is just tremendous in the FMCG sector. But what I mean by "pasta" has to be taken with a pinch of salt! Most of the instant noodles and pasta on the shelves are indigenously modified to suit local taste buds. It would be nothing like pasta "back home!"
To recap, when a market leader is around, copy-cats abound. So, how is the market leader to try and raise itself above the others? Instead of fine-tuning or developing the product more to suit the market (when, as you point out, the market knows what is good about the leader's products), the leader would do well to develop the market!
That may come as surprising, but if you gave it some thought we'd be able to see that is what most marketing and advertising campaigns are all about. But I don't mean that at all. What I mean by developing the market is to get it ready to "embrace more quality" from its products and to co-opt members of the market themselves to promote the product in question.
Now, sub-sets of the population (of the mature market) would be able to lend a hand, either explicitly or implicitly, only if they discern top-quality in the products on sale. To give an example at this point, we need not think too hard to see why the brand, "De Beers" is synonymous with the quality of the diamonds that are sold under that brand name! In fact, every buyer who has ever bought a diamond becomes in effect an advertiser for the brand.
So, more innovation is not the answer for the market leader to stay on top, but more development of the market is the answer. As I pointed out earlier, more innovation only poses a risk to one's ROI (return on investment / return on innovation)...
IMPROVISATION is the key! And the market leader needs to prepare the context (the market and the sub-sets of the population that it serves) in such a way that the maturity of the market takes over in sustaining the growth and development of the product in question...
Rightfully so. I didn't work for the low-cost provider. I misinterpreted the signs. It was wired, and completely price driven. We spent alot of money.
On the other hand, sometimes I have to pay to play. If the winner requires help, at least I showed up, and prospects and customers remember that. In the preceding case, the winner had issues and we could have played a larger role. But my management was jaded, and we waited to long to enter the fray. We got something, but not enough to pay for writing the proposal.
Innovation itself is also a competitive game. On the other hand, Blue Ocean Strategy opens a door to an undefined battlefield for competition where Red Ocean Strategy comes in. The point is how soon the competitors comes in, especially for those copy-cats.
There is a Chinese word - "ShanZhai" - which is now hottest around the world, originally meaning a stockaded village while in allusion to an imitation by an unknown workshop. The speed and likeness of copy is amazing. "Blueberry" launched yesterday could be "ShanZhai" when waking up this morning with exactly the same outlook and more advanced function (unknown quality), more importantly, much lower price.
Another Chinese colloquialism says that it's easy to win the world but difficult to guard it. Somethings we can think of:
(1) Blue Ocean Strategy is a continouse process rather than an once-off action. Don't expect others incapable to copy. No matter how top the tech you believe, it will be copied one day sooner or later. Keep moving and grab the business opportunity in the blank time when you are the only one in the new market.
(2) Ask yourself if you are over-innovative? It seems silly that can innovation be over? But if the innovation is well educated to consumer and if they have already prepared the money for paying that?
Price is the intangible value consumer perceived for a tangible product. The absolute price gap is not the issue to impact on consumer choice. If a consumer is willing to pay lower price for a copied one even though they know it's of low quality. Why? It's not purely because you are more expensive than the copied one but your product is perceived lower value than the price tagged.
Blue Ocean Strategy is not only to exploit a new market but also to wake up the needs inside consumers which they are probably not aware of. Show the value, show the money.
This said, and given that so much of buying and product use is psychological - it has me note that so many products in our world have the ability to be adapted and utilized in many different ways, and such have the chance to increase their financial value.
Consider writing on how utility adaptation/marketing/training genius can be utilized to give a well built/known product new, healthy life through deeper thinking....
Side note -- you've glanced over what I am suggesting - and I'd have you consider a deeper cut.
Meaning the client might purchase somewhere else but if you keep in touch it might happen he's not satisfied with what he got for the lower amount and comes back to you later.
Just keep in touch with your potential customers even those who went to the competition and you might just get lucky eventually. After a few weeks / months, have a word with them and ask if they are satisfied.
Getting feedback also helps know the quality of your competitors.
Regards,
Bruno
-If you are playing on price alone you lose on price alone.
-If going in you had no idea that competitors had ability to undercut you by 40% and still make a profit then you have a pretty non competitive product and some pretty bad management who don't know their own business and market.
-What is your products value proposition in the consumers eyes? If they think it is a generic product/service with little maintenance needed and sole reason they buy is because of possibly a personal relationship (golf and dinners only go so far) then price will come up, escpecially in todays climate on buyers end. 40% undercut on price by competitor? You are toast.
-Is your product positioned properly? Are there aspects of your product you do not market correctly? Hidden value to buyer you have not capitalized on (if competitor has bad quality have you monitised to your customer costs to them down the road?).
-If this is price based business and purchases are build on relationships and you are getting your but kicked...and you are 40% off on competitive bids either buy your competitor, sell your business assetts and buy some real estate.