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November 2, 2010

Competing on price – aggressive growth strategy or a competition to see who can stay the poorest, longest?

by Howard Fox Chartered Marketer

Price. Possibly the most critical marketing “P”, and yet often the most overlooked. The fundamental question is, how often do we as marketers abdicate the responsibility for pricing to our accounting colleagues? Or ignore market (and marketing) imperatives and simply base pricing on cost and an expected return to the company? We are all familiar with the ‘Cost Accountant’ [def: An accountant who keeps records of the costs of production and distribution]. Perhaps we need a few more ‘Price Marketers’.

Possible strategies.
Remember Porter’s generic strategies: 1) Market focus (based on segmentation), 2) differentiation and 3) cost leadership? If not you can gen up at wikipedia – [:http://en.wikipedia.org/wiki/Porter_generic_strategies%5D For this discussion, we are focusing (pardon the pun) on cost / price leadership.

My first point is that there really is no specific link between price and cost. There is certainly no strategic imperative to link the two. There might be some gross limits: if price is lower than variable production cost, it only makes sense to continue selling if there is some strategic advantage to increased sales. This has appeared to remain a popular strategy for Internet companies at start-up. Amazon is cited as popularising this “grow-big-fast” strategy, accepting early losses to become market dominant and enjoy exceptional profits later. These are gutsy strategies. But sanity must still prevail. In the longer term if the price doesn’t cover the fully adsorbed cost of production, the shareholders get more than a little anxious. I worked in an Internet start-up during the “dot.com boom” in 2000 where we glibly referred to our monthly “burn rate” – how quickly we were burning through our cash reserves as we desperately tried to get sales volumes up. Our shareholder’s support burned up even faster than our reserves!

Howard Fox with Moky Makura on the occasion of the launch of “Going Global” published in conjunction with GIBS and MME Media

A critical issue is whether the seller can set the price or has to accept being a price taker. Producers of commodities are price takers. Let’s look at gold as an example. The price is set twice a day in London. Gold producers can set their prices at a premium, but are unlikely to move much bullion. The only way to increase profitability under these conditions is cost reduction, which eventually becomes limited. The answer for marketers is differentiation. Now while Porter warned against the dangers of being strategically “stuck in the middle”, i.e. failing to fully commit to one of his generic strategies and attempting to leverage advantages from more than one – thinking has moved on. A combination of lowest cost producer, together with differentiation is a potent strategy. Back to our gold example -remember “proof Krugerrands”? I am not sure what premium they sell for at present, but I recall some very significant premiums in the 80’s. Physically a proof Kruggerrand differs only very slightly from its commodity bullion counterpart: the coin blanks are polished, they are stamped twice and the number of serration around the edge differs. But they still contain the same quantity of gold, and must cost virtually the same to produce. Convince the market that they are “collectors items” with “strictly limited numbers” (which cost nothing) and a substantial premium can be enjoyed. How many of our products could benefit from similar thinking?

The fundamental point is that pricing is a very powerful lever to profitability and is a potent strategic marketing value-add. In online businesses, it often defines the entire business model. Look at Groupon (the name is a play on ‘coupon’) [Ref: http://www.groupon.com]. They offer ridiculous discounts for their partners’ goods and service (up to 90% off) but the discounts only activate when a predetermined minimum number of consumers have taken up the offer. Thus everyone who has bought-in become ardent sales reps trying to get their friends and colleagues in on the deal. Here is a business whose entire strategy is about price. Yet in our day-to-day marketing, price is often overlooked for the flashier and less numerical portion of our jobs. It shouldn’t be.

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