LESSON 6. Avoid Competing On Price

There are only two ways of actively competing for customers (i.e., taking away share) in mature markets: offering a comparable or identical service at a price lower than the competition, or finding a way to differentiate the product or service either at the accepted market price or in such a way that a premium price is justified.  In almost all circumstances, differentiation (through innovation) is the preferred route, as low-price strategies tend not to provide a sustainable competitive advantage.

The only time it makes sense for a firm to launch a price war is when it is confident that already- weakened competitors will collapse under the strain.  Remember the Cola Wars? In the 1970s and 1980s, giants Coke and Pepsi temporarily battled it out on lower prices, but when it was all over, their relative competitive positions remained unchanged. Smaller companies, however, went out of business during this time since, unlike Coca Cola, they didn’t have hundreds of millions of dollars with which to defend themselves against the “Pepsi Challenge”. In such scenarios, most “victim firms”, sensing a loss in their market share, will respond rapidly to the price reductions and then aggressively work on their own cost reduction programs to restore margins.  Therein lies the lack of attractiveness of this approach. A similar situation is unfolding among the world’s airlines.

By contrast, a differentiation strategy avoids almost all problems associated with a lower price one.  By changing the rules of the game through differentiation, a company can neutralize competitors or remove them from the playing field outright, usually for a considerable period of time.  This is now often referred to as a ‘blue ocean strategy’. Canon accomplished this when it decided to sell its photocopier machines through distributors rather than mimic Xerox’s direct sales model.  CNN did the same when it concentrated on television news and marketing itself globally through cable companies instead of emulating domestic broadcasters.  Wal-Mart, too, changed the rules by initially opening in rural locations rather than those big cities where discount retailers concentrated their energies.  And the stronger the differentiation, the more difficult it is for competitors to match your offerings. Just ask Research in Motion as they struggle to catch up with Apple, which at this point they probably never will.