How To React When Competitors Lower Price

by | Jun 2, 2013 | Pricing, Uncategorized

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Follow Up From May 2013 Webinar with John Hogan

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Q: What happens in markets where competitors are constantly lowering price?

A:  In my experience over the last three or four years, that’s virtually every market out there. So it is a critical problem that everyone’s facing. And it’s almost a paradox of the times, in that never before has it been so important for us to drive innovation and value into the marketplace; yet at the same time, it’s never been harder to get paid for that. Companies have gotten much more sophisticated about how they use procurement systems, how they extract that value, and extract discounts. That’s something that all companies are dealing with. The key thing—and it’s a much deeper discussion to show how we could actually protect that value—that we can do is, in the development process, develop flexibility into the versions of the product that are coming into the market.

To take a simple example, we can create a low value version and a high value version of the product. The high value version has the new technology, whereas the low value version is more of a commodity product. This enables us to go to market, and when that low price competitor who doesn’t have the same value as our high value product starts to price aggressively, we’ll go toe to toe with them and price aggressively on our low value product, while maintaining our price and our margins on the high value product. And that’s how we’re going to continue to grow. Competitors that don’t have the ability to protect their high value offers are at a significant competitive disadvantage. The last thing I would say about it is that most companies, when they’re facing intense price pressure from low price competitors, feel that the low price competitor has the advantage. In fact, if you’re smart and if you know what to do, you’ve actually got the advantage. You’ve just got to play the game the right way.

Q: How do you quantify a more subjective feature like UI?

A: It’s actually not that hard. The trap here is to think that, because the feature is not tangible in type, you can’t quantify the impact. But we don’t care what the feature is, what we care about is how that feature changes what the customer does. With UI, you can ask yourself, “How does that speed up or slow down the work process?” I actually did this for a company in the travel industry, and what we found was very interesting. For their power users who were accustomed to the old, non-graphical UI, the new graphical interface actually slowed them down. But for most users who were less sophisticated, the UI saved them so much time because they didn’t have look up various codes. And because this was such an important value driver for this company, they did a couple of workflow studies. So they quantified exactly how much time was saved, documented it, and got a dollar figure for a very powerful value driver for them.

Ed: A good technique to think about value drivers is Feature-Benefit-Value Driver mapping. Something like UI is a feature; it describes what the product does. Next, you need to define the customer benefit. Why should they care? That involves asking questions like, “Why is that important?” And the answer depends on the particular type of user. What you’ll often find is that the things people really care about, generally, have some sort of economic impact, or value driver. Often it involves time saving, productivity increase, or other things like that.

Q: How does conjoint analysis fit into this type of work? 

A: Conjoint is a very useful tool, but it measures something fundamentally different than economic value. Conjoint analysis essentially measures perceived value, which is often framed in the context of willingness to pay. The problem with conjoint for new products, and this is a substantial problem, is that if you’re bringing new value to the market, then by definition customers will not understand the value. It’s new, and they don’t fully understand it. So the willingness to pay for that, during the time of analysis, may not be an accurate reflection for willingness to pay at the time of sale, once your sales team has gone out and explained the value. So it leads to a tendency to underprice more innovative new products. It’s a useful tool, but it’s something that you should understand and use with thought.

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