The Race to the Bottom: Winning the Price War

When your customer tells you that your prices are somewhat higher as compared to other brands, they are not saying that they’re not going to buy

By: JUSTINE P. CASTELLON 

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Photo from freedigitalphotos.net

There’s uncertainty in the air. The Philippine economy is wobbly, businesses are compelled to tighten belts and customer loyalty is slipping away. On top of that, the value of the peso has plummeted and consumers aren’t able to purchase as much with that peso as they could have last month or last year. For businesses and consumers, weathering the daily grind would have to involve more than rolling with the punches.

Most businesses are planning superfluous efforts to ride out the tough times. Some are cutting back on marketing expenses and waiting until the economy improves, while some are crafting more creative and aggressive strategies. Meanwhile, we see proliferation of products and services that complicate consumers’ buying behaviors even more. The made-in-China 168 stores in Divisoria corners the market of toys and gifts and other household items for the budget-conscious. Then there are the export over-runs in tiangges, and the Salvation Army’s clothes in the ubiquitous Ukay Ukay stall. Original products from Japan in All 88 stores in malls offer competitively lower prices in household items. There are too many choices for consumers out there, and companies left and right are scratching their heads, formulating the best marketing tactics to get hold of what little resources consumers are willing to spend. This is the race to the bottom . . . the battle of price war.

A price war is not simply a matter of responding to a competitor’s aggressive price move. It drives other products and services to work more on their value side. It polarizes the customers to either the price side or the value side, and leaves most of them confused when they are trying to make buying decisions. Today the market is split between those who buy for low price and those who buy for value. Relatively few customers stand in the middle and step in both directions.

The race is on. And it’s win or lose.

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The decision to engage in price war is to avoid declining in market share; or intensifying value over price and bank on the loyalty of those who continuously patronage your brand.

Josiah Go, Chairman and Chief Marketing Strategist of Mansmith and Fielders, Inc., and author of several bestselling marketing books, says price wars happen “when competition in an industry lowers prices of goods, companies hoping to attain competitive advantage.” It is when a retailer under-prices the competition, which can create a cycle of two or more retailers lowering prices in turn to undercut the other.

It’s necessary to understand why a price war is occurring—or why it may occur. According to Go, price wars occur when there is an identical way of doing business, “when a market challenger wants to gain new customers and critical mass fast like the Sun Cellular’s unlimited usage.”  Sun Cellular of Digitel Mobile Philippines Inc. intensified the price war among mobile phone operators with its 24/7 unlimited call and text service. This aggressive marketing strategy has helped the newcomer grow its subscriber base tremendously prior to the launch of the campaign. The “price-cutting momentum” drives other competitors to follow the initial move. Globe Telecom Inc. and Smart Communications, Inc. followed suit with a similar scheme, their unlimited text and call promos. Thus, the price war among mobile communications begins . . .

Initiating price changes is not just about lowering the price to gain customer.  It is about developing an economy model which gives the market what it wants.   

 

Field Sprint to the bottom of the market.
Slowdowns hit so hard and fast that in most industries sales had to scramble. And while some industries held their own, notably pharmaceutical, which appears to be almost recession-proof has experience dried-up sales.  When sales are good, marketers enjoy working on the demands of those who can afford products and services: the upper and middle class market. But during slowdowns, they work harder to get more out of every market opportunities which include, tapping the bottom of the market or what we classified as low-income market. Eventually, this became the goldmine to other business opportunities.

Averell Gaspar, Head of marketing and sales of the Getz Pharma, a new player in the branded-generic pharmaceuticals market, views the low-to-mid-income market not just a market opportunity for affordable branded generic medicines but an important segment  in improving the total healthcare industry in the country. It is true that the low-to-mid-income market is a bit more complex than the rest of the upper segment because the buying decision is slower, and often times, you hear price objections because of the limited buying power – in short, they want to get the most of their money’s worth. (Even the high-income segment has become more price-sensitive.)

692With them, you’re not just dealing with price concerns but more so with quality to extend the life span of the products and services involved.  They constantly seek the best among the best offers. Because of these, it is more difficult to develop loyalty. But once you tap into their emotional sense of well-being, they become your greatest patrons.  Thus, marketing to them requires an emphasis on certain critical skills. Remember, price changes trigger different responses from the market.  Think of innovative ways to sharpen your weapon in the battle of pricing:

  1. Shrinking the amount of product to accommodate lower pricing: Coca-Cola Sakto becomes blockbuster in this segment when the original 237ml popular beverage reduced to 200ml and offered it at the lowest price among competitors.
  2. Using less expensive packaging materials:  Sachet rules in the Philippine consumers.  Shampoos, bar soaps, and even canned and bottled preserved food used sachet to lower the cost of goods.  Now they even reduced the packaging sizes to reach a wider range of the market.
  3. Substituting  less expensive materials and ingredients. Many  candy-bar companies substituted cocoa liquor for cocoa butter to absorb the impact of high cost of cocoa.
  4. Removing or reducing services.  Some products comes with installation instruction and positioned it as “do-it-yourself” to get rid of the free installation feature.  Delivery becomes optional, some offered minimal fee of home delivery instead of the normal offering of free delivery.
  5. Reducing the number of sizes and models offered. Developed and market the most perceived size and models to avoid stock up in your storage.  In this, marketing research is very essential to determine the exact need of this segmented market.
  6. Creating a new economy brand. Getz Pharma’s  offered bioequivalence and bioavailability medicines at almost 60% Off the usual branded medicines without sacrificing quality.

Bridging the gap.
According to Gaspar, there are two types of reactions from the big brands: 1) Pump in more marketing to protect market shares or 2) Convert prescriptions or channel promotion to newer, improved molecules, if available. In many cases, market leaders even increase prices further  to “milk the cow” to the max while brand equity and loyalty remains high.  So how are they going to manage entry in this segment?  Having recognized that the members of the lower income market far outnumber those from the middle and upper income brackets, the logical option is to cater to these markets who cannot afford the cost of expensive healthcare solution.

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Based on market studies, Gaspar learned that in order for a shift in loyalty to occur, the prices of new entrants must be between 35% and 50% off the price of the leading brand. This translates to substantial savings to patients and improves compliance to treatment.

“In fact, customers now wield a strong influence on the entry price strategy of new products. Today, doctors have become highly concerned with affordability of medicines. Quality is a given proposition and therefore they push for lower priced medications.” Interestingly, one of our campaign slogans where we said ‘What’s the use of a good drug if only a few can afford it’ made many doctors smile and related well on the message,” he added.

Getz’ primary consideration is to offer products at lowest price possible level so that more people can gain access to otherwise expensive medicines. This is the cost of entry if you want to be successful in this market. We now have to think ‘patients first.’   “That is why we have embraced the slogan  ‘Putting patients first’ in order to guide all our decisions toward this end,” he stresses.

Gaspar emphasizes however that price is not the driver of long term success. Quality is. Once you determine the right price and market access levels, you have to focus on communicating quality as the bedrock of your marketing message. The medicines have got to work! Patients have to get well. “Once a product fails to deliver on its promise, it will not make it even if it is the lowest option there is,” he added.

The Alternative Route to Winning the Race
Sure, rock-bottom pricing can draw customers into your store, but what happens after that? According to Winninger, the business-consumer relationship doesn’t end with a purchase. It begins with a purchase. The purchase of an item should be the threshold to a long-term relationship that is fortified by verification of the quality of your business’ service and delivery. Crafting the right marketing strategies and reinforcing sales while avoiding price cut will not only strengthen your business now, it will also prime it for growth later. So, before you race to the bottom, and engage in price combat, find an alternative route first. Josiah Go shares the Mansmith and Fielders’ 12 Options to Price Wars:

1.  Find a value segment that is not price sensitive.
Waters Bio Mineral Pot is the leader in the premium segment of water purifiers in the Philippines. At the time of price wars among water refill stations and purifiers, it did not resort to cutting prices because it has established itself in the value segment early.  Waters Philippines (www.waters.com.ph) continues to grow in the last few years, including doubling of its sales volume in the first quarter of 2006.

2. Redesign the product.
Hortaleza Beauty Center decided to launch their own multi-brand private labels instead of selling the same items as any other personal care stores. This strategic move paid off as the sales of their own higher margin labels is now over 70% of total sales versus a measly 3% three years ago.

3. Introduce flanker brands.
When Beer na Beer attacked San Miguel Beer with lower prices in 1988, San Miguel wisely pushed their lower priced Gold Eagle brand and shielded themselves from possible revenue and profit decline.

4. Be the first mover geographically.
The first Waltermart store was in busy E. Rodriquez Avenue in Quezon City in 1993. Not contented with price wars from neighboring stores, Waltermart decided to open 10 stores in the Laguna-Cavite area ahead of the big supermarkets, giving them a head start advantage without resorting to price wars to gain and maintain customers.

5. Offer free goods to improve value proposition.
When Ph Care attacked Lactacyd with a much lower priced product in August 2002, the latter did not adjust their pricing strategy. Research told the Lactacyd marketers that they enjoy a high loyalty level, thus, Lactacyd simply offered more products for the same price or free gift items for every purchase. Today, the market for intimate wash has expanded to more than double the market size 3 years ago and Lactacyd continues to grow in volume while enjoying decent profitability from a well-calculated “no price war” decision.

6. Bundle different products together.
Buffet lunch and dinner are examples of bundled products. Buying a product individually will cost a company more but buying it as a whole without any price breakdown for individual components makes it hard for clients to guess the price of each individual product. PLDT resorts to this strategy with some clients.

7.  Establish alliance with another companies.
Marketing alliance means that a co-marketed product becomes more valuable than taken separately. For instance, Compaq laptops had alliance program with Kodak digital cameras in the past, offering better value for money when bought together.

8.  Offer loyalty programs.
Appliance manufacturers offer dealer incentives like cars and trips and these dealers have commitments to the manufacturers, thereby shutting out their competitors offering lower prices. Colgate also offers incentives for supermarkets granting them bigger shelf space, thus, avoiding the probability of a clash with lower price competition without access to shelf space.

9. Communicate superiority.
Verbatim tries to be associated with dependability thereby implying that buying a generic or lower cost diskette means the risk of not getting the data when needed.

10. Offer a better image.
Rustans Department Store is differentiated in that its gift-wrapping paper offers the prestige association enabling any gift recipient to feel more important than getting a gift from just any other corner stores.

11. Reengineer to gain lower cost.
In a price war, a company with lower costs will usually still end up being more profitable than competition. Thus, if Philippine Airlines will launch a price attack versus Cebu Pacific Air, the latter more efficient “passengers per employee”, among other cost-efficient measures will push them to a better financial position.

12. Agree with competition to compete based on other variables like service (if local laws would allow).

When all else will not work, consider a friendly dinner with competition to stop the price war and rechannel competitive energies to other areas like service, value-added and the likes.

Race Over?
A price war brings an advantage to businesses trying to gain access to market share, although this is not always applicable to all businesses. Price reduction should not be viewed as a Band-Aid solution. Rather, it has to be aligned with your long-term solutions. Company factors such as cost structures, capabilities, and strategic positioning should also be examined carefully. Cost structures may be affected by changes in technology or business practices, which in turn may tempt a company to cut prices in a manner that will trigger a price war.

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Some businesses believe that they will be driven out of business if they do not compete with the price cuts. What’s more dangerous though, is that they can run themselves out of business by competing on their competitors’ terms: low prices!  The easiest way to compete with a price merchant is NOT to compete on price. “Do not defend price. Stress value when customers ask price,” writes Thomas J. Winninger in his book Price Wars (How to Win The Battle for Your Customer). “Consumers judge value by what they get in return for their money.”

Take the super brands’ approach in price war. Instead of a price reduction, they develop creative and long-term strategies. Unilever builds strong a strategic alliance consisting of its brands (bundling and co-branding promotions). Sara Lee restructures the organization to become consumer-driven instead of product-driven (stronger relationships with its customer base). And Nestle goes beyond the norms of P.O.P (Point of Purchase), it aligns the overall strategies to become consumer-centric. Their common denominator is customer value. And value is subjective . . . this component is the golden key to success in the battle of price war.

So when your customer tells you that your prices are somewhat higher as compared to other brands, they are not saying that they’re not going to buy.  They’re giving you the chance to explain “value”.

“Differentiation wins the race. Price, as a competitive advantage, is temporal. There will always be a new product that will come lower in price than your product with comparable or even better quality. The challenge of every marketer is to identify and establish product differentiation that ultimately builds and sustains customer loyalty.” ended Gaspar

EDITOR’S NOTE: repost from cover story of Ad Edge May 2006

 

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