Every so often I set aside a few hours of my day to analyze the competitive landscape for our business. I like to see what our competitors are up to, and in most cases, it’s business as usual. Sometimes though a new competitor pops up, while another may disappear. Other times, I find a new tool our business should look into further to drive us to be better. But for the most part, things are status quo.
This past month proved unique. We were looking at several companies for possible acquisition who were direct competitors of each other. What we found around pricing strategies and their results was unexpected and not normally easily identifiable from typical research tactics on private companies—and guess work, around such things, can lead to costly mistakes.
Company A had a larger market share with a higher price point compared to the competition. Their growth pattern was not where they desired it to be. Company B was in a growth pattern by slashing prices and taking Company A’s clientele. The assumption was that Company B couldn’t be making money. They were wrong. Company B was making more money as a percentage of sales. A healthy margin was fueling their success.
This reminded me of a seminar I attended last year where Vistage speaker, Sam Bowers, made an interesting point. He said, “If your competition is offering products or services at a price significantly below yours, don’t assume they’re not making money, because they probably are.” Case in point in this real life situation.
When you know the competition is undercutting you and taking bits out of your market share, what do you do as a manager or as a business leader?
Choices to beat the low-cost competition:
- BETTER – what is your competitive advantage: what sets you apart? (prove why you are the better choice)
- UNBUNDLE YOUR PRICING – your value added services – today customers only want to pay for what they value. Don’t charge them for something they don’t value, charge them for what they do.
- ALLOCATE YOUR COSTS PROPERLY – allocate your costs based on true activity costs instead of arbitrary overhead allocations that misrepresent what your products and services are actually delivering.
- DETERMINE IF YOU MISSED SIGNIFICANT CHANGES IN OPERATIONS EFFICIENCIES – the world is changing quickly and your competition may have figured out a better way. Don’t let pride get in the way of your pocket-book. See if they are doing something better.
One thing we all know is that lowering costs does not guarantee profits. Take everything into perspective by taking a deeper look at your company versus the competition. For even more helpful information, this resource is excellent… How to Beat a Lower-Priced Competitor, By Geoffrey James, BNET
When we compare apples to apples, Company A and Company B aren’t in the same bucket. Company A isn’t uncompetitive; they aren’t properly allocating their costs, causing their core product to be more expensive than their competitors. They have a more diversified product and service base. Over the years they brought on new tools and services that were outside the core business plan, forcing them to subsidize the costs across all products. Company B figured out how to manage their core competencies more efficiently to deliver a lower cost product. The real question becomes—Is there enough room for both positioning strategies in the market?
The moral of the story? Don’t keep your head in the sand when it comes to your competition and pricing strategies. Take a hard look at your organization like Company A did, try to gain information about your competitor and then make the necessary strategic changes. Keep in mind your organization’s readiness to act effectively on the change required. It’s not easy to believe that someone may have figured out a better way of doing business than you, but the market will show you the way. Now all you need to do is listen. Then take action.
Greg Thiesen, CEO, B2A