How To Avoid Price Warfare!

B540RE TESCO SUPERMARKET

Social marketing rests its laurels on ensuring products and services are appealing and accessible to a specific target audience – in many cases, lower SES and high risk communities.  To do this, particularly when leveraging the private sector as a channel to better reach this audience, social marketing organizations often subsidize their products and services so that the private trade is incentivized to stock certain products they normally wouldn’t to improve access for end users.

Socially marketed condoms are a perfect example of this, wherein social marketing organizations ensure that the trade margins are sweet enough that shopkeepers will be incentivized to carry condoms – a product that historically was only found in clinics, health centers, and pharmacies.  But to offer this sweet trade margin in conjunction with a very affordable price to the end user, social marketing organizations often sell condoms at an immediate loss – relying on donor funding to fill the gap.

What this practice amounts to is similar to an aggressive price war – wherein large companies with massive market share and economies of scale keeping prices so low that no other competitors can retain market share.  But as stewards of market growth and private sector sustainability, it is our responsibility – that is, the responsibility of social marketing organizations selling condoms – to walk away from prices that are artificially low in order to grow our sales volumes.  We must stop fighting this pseudo-“price war” amongst ourselves and identify other solutions for maintaining/growing impact that do not strangle the private condom sector and, instead, allow it to thrive outside of our individual impact.   Despite the proven success of price war tactics, this article will explore alternatives to traditional price war strategies.

henry-martin-price-war-new-yorker-cartoon

 

Non Price Responses:

Tactic 1: Advertise Cost Advantage

One strategy is to make clear your cost competitiveness to the market, leveraging your ability to get the lowest costs in the industry.  This will deter competitors to engage in a price battle with you – unless they know they have lower costs than you.

For large social marketing organization like PSI, there exists the ability to reduce our costs if we simplify our portfolio and streamline our offering – to take advantage of economies of scale.  But there might be other competitors out there that are more nimble, have lower operating expenses and administrative costs, and therefore this tactic should only be used if you intend to follow through.

Sara Lee snacks is one company that administers this approach, leveraging their incredibly low variable costs to proactively prevent a price war.  They don’t cut prices because it would be inconsistent with their strategy – in fact, they are often more high priced than competitors, but if competitors engage in extreme price warfare with Sara Lee, they could quickly and easily respond and outlast the competition at a lower price point – returning to normal levels once the competition is forced to raise prices in the long run.

Tactic 2: Take the Quality High Road

Probably the most sought after strategy for those brands wishing to avoid price warfare is to play up your quality strengths.  During the infamous 1996 color TV price battle in China, when Chinese manufacturer Changhong initiated an aggressive price war and increased market share from 16.68% to 31.64%, Sony and Panasonic decided to not engage and maintained market share, remaining in the top ten brands.  While their market share definitely suffered, they did not suffer as much as the domestic players who engaged in the price warfare.  Similarly, Ritz Carlton hotels in Malaysia during the economic downturn of the late 1990’s took a decidedly different approach to maintaining business.

While all the other luxury hotel chains slashed prices (and therefore amenities), the Ritz Carlton amplified the amenities they offered guests, meeting arriving guests at the airport with mimosa’s, live music, discount coupons, and a model room installation to showcase their exceptional service.  It resulted in the best sales result in the country among the luxury hotel competition, more bookings, and maintained the brand equity as a luxury hotel operator.

Tactic 3: Play Dirty Against the Cheaper Competition

Similarly related to playing up your quality features is to showcase these quality features and details against the competitions cheaper offerings.  There are some categories, such as health care and transport, where quality still reigns over cheap prices.  Condoms are no different – who would want a cheaper condom if they discovered it would possibly break when used??

If your condom brand plays up the fact that it will be there when you need it, it will be the most reliable, most protective condom they can buy – period, then you might raise awareness among your target audience that there exist alternatives that can’t offer the same benefits.

A direct approach was taken by NutraSweet, the company that makes artificial sweetener for Diet Pepsi and Diet Coke, when they feared Coke and Pepsi might try to drop them for cheaper alternatives.  They met with each team and explained that they were prepared to make a negative ad campaign against whichever brand decided to switch suppliers, effectively eliminating a price war with generic alternatives.

Tactic 4: Leverage Strategic Partnerships

Sometimes, when you are being attacked on price, you can leverage your relationships to ensure you don’t have to worry about the attack.  In other words, you can make agreements or special deals with industry suppliers, retailers, wholesalers, etc. that will link you to a powerful ally and encourage them to not switch teams to the cheaper alternative.

For example, when Sony entered the market for high-end imaging systems, the leaders in the imaging systems market in Belgium appealed to and received help from the central Belgian government.  This could also be seen as a form of trade embargo or tariff on new market entrants. But countless brands have done this and allowed their offering to survive in the market.

price-war-on-amazon

 

Short Term Price Responses:

Now, sometimes, you will be left with no alternative but to engage in price warfare and when that happens, you can employ some of the following tactics to avoid full-fledged and permanent price reductions for the entire market:

Tactic 1: Change the Frame of Reference

When someone is competing with you directly, product to product, with a cheaper price, you can employ a frame of reference change: that is, change how consumers see your product.

taco bell

Above: Taco Bell’s first “Value Menu” introducing the cheap, 59-cent Taco was a game changer in 1990.

When McDonald’s was attacked by Taco Bell’s “59-cent Taco” strategy, they noticed that consumers were weighing their purchasing decision on the price of a taco versus the price of a burger.  To change the frame of reference, they introduced the “Value Meal,” which effectively said ‘ok, you can’t buy a burger for 59 cents, but you can buy an entire lunch – burger, fries, and drink – for only a few dollars.”  This changed the decision making process for consumers, now offering McDonald’s the competitive advantage in the battle not of “tacos versus burgers” but in “lunch versus lunch.”

Tactic 2: Modify Certain Prices Only

If someone is trying to compete with you on price in certain areas, it can be ok  – in the short term – to keep prices low in that given area to fend off any losses to market share.  Take for instance Northwest Airlines’ response to new market entrant Sun Country in Minneapolis-St. Paul.  The new airline offered a very cheap flight to Boston and, instead of reducing prices across the board, Northwest Airlines decided to offer basically the same fare from Minneapolis to Boston, at roughly the same time of day, and available only when purchased in advance, as Sun Country.  This strategy outlasted Sun Country’s ability to hold on and they couldn’t compete at this low price to Boston.

Tactic 3: Launch a Fighting Brand

If your well established brand is being attacked by a cheaper competitor, sometimes you don’t want to hurt your brand’s equity by getting its hands dirty in price warfare; instead, you can outsource your dirty work to a fighter brand.

luvs

Above: Luvs is all about not paying for pricey diapers (Pampers) because experienced mothers know better – they just want good value.

A fighter brand does two things at once: competes with the cheaper brands on price, to minimize their impact, and secondly it protects the status (and higher income) achieved by a more premium brand.  There are lots of fighter brands out there in the market: P&G’s Luvs Diapers (to fight store brand diapers and protect Pampers Diapers – funny commercial here); General Motors’ Saturn Autos (to fight Honda and Toyota and to protect Buick, GMC, and Oldsmobile); Phillip Morris’ Bond Street Cigarettes (to fight local brands across the globe, drive entry at low prices in growth markets (Africa and Asia), and maintain Marlboro as a higher priced alternative.

The drawbacks can be severe – you can cannibalize your own sales (Kodak’s Funtime film), it might get crushed by the competition and therefore must be very decisively the market leader at the bottom tier, and it needs to be cost recoverable in the long run (losses can only happen in the short term).  But in a cluttered market where many lower priced alternatives are entering the market, fighter brands can often help you compete and save your premium brand.

Tactic 4: Reduce Prices in Specific Channels

If you have too much stock, or stock that you need to move, you can be choiceful about where you might offer these products at a discount – targeting a more budget conscious consumer.  For instance, the advent of priceline.com, joyago.com, kayak.com, and Travelocity.com are all due to the airlines and hoteliers trying to offload stock at discounted prices to budget consumers – a good way to lower your prices but still be able to justify their higher prices elsewhere.

vlasic

Above: The disastrously successful 1 gallon jar of Vlasic Pickles

However, this can also cause serious problems.  Ever heard of Vlasic Pickles?  The once dominant pickle brand in the USA was once considered the gold standard in pickles.  But then they made a deal to sell a gallon of pickles through retailer Wal Mart at a shocking $3 a gallon – 9 pounds of pickles!  This left about 1 penny profit for both Wal Mart and Vlasic, not a sustainable proposition.  But Wal Mart championed the gallon of pickles as a statement about their business – only at Wal Mart can you buy a premium pickle for less than small retailers can sell a small jar of pickles. The results? It was so successful that Vlasic saw all their clients transition to Wal Mart to buy their pickles, resulting in plummeting sales for their profitable SKUs and massive increases in their $3 jar SKU.  They went bankrupt in 2001 and have disappeared completely (Wal Mart was rather to blame here, but that’s for another story).

These are just a few tactics that are possible to embrace when confronted with a terrifying price war.  But the general wisdom, particularly if your brand is barely profitable/already operating at a loss, is to not engage in price wars and try to leverage anything else at your disposal in order to maintain market share.

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