Best Experienced With: Social Distortion; Story of My Life
(please right click on the link to open up a new window with the suggested background music for this treatise)
No one wins a price war. No one ever, ever, ever wins a price war.
Oops. Was only looking at that from a market participant point of view. The buyer always wins during a price war. The buyer always, always, always wins a price war. The sellers lose. You cannot win an argument with me on this because math and science are on my side. And God. God is on my side because I am Irish Catholic and we are the chosen people. Mostly though, I have math and science on my side.
Was reminded of this last month when Microsoft lowered the price of their X-Box Elite by 25%, from $400 to $300. Why? Sony had just dropped the price of PlayStation 3 to $300. Stupid.
If you have sat through one of my classes, sat across from me at a desk, or chatted with me on the phone about business, you have heard me say “no one wins a price war”. If you have called me and said “well, (insert name here) is less expensive than me and they are going to buy from them” then you know my reply is a two parter:
- “Well, then you lose……go sell somewhere else and quit whining”
- “Looks like you failed to qualify the customer properly OR you failed to show that there is value in you and your product. Now quit whining and go sell somewhere else”
Regardless who you are or in what market you compete, someone will always be less expensive than you. If you are the price leader right now, I promise you that within a year or two there will be a new entrant that is less expensive than you. How do I know that no one ever wins a price war? Is it just my opinion? The opinion of a publicly educated kid from Cleveland?
Nope. It is the precept of one of the best known and most studied Harvard Business Review case studies called “Phillip Morris: Marlboro Friday”. If you click the link at the bottom, you can invest $7.00 in your future and purchase the full case study. It clearly shows that waging a price war loses money for everyone….the most expensive folks in the market space and the least expensive folks in the market space. The only people that won were the smokers that are all going to get FREE healthcare even though they choose to poison themselves daily. I wonder if I pay for their oxygen tanks and chemotherapy treatment, maybe the smokers will cook me dinner once a week. That seems fair.
Have sat through meetings where others argued for market share at any price using General Electric’s 1960 PIMS rationale. Profit Impact of Market Strategy (PIMS) was worshipped as god for many years and, rightly so, still holds some measure of truth. GE had a great advanced dB that analyzed various marketing strategy on business performance. PIMS showed that over a long event horizon, relative market share was the greatest predictor of profitability and the best indicator of where to invest new capital for the greatest ROI.
The very simple argument of “we need to grab market share” is nonsensical as a stand alone argument. In any given market space, you have a pie cut up into various pieces of gross profit margin (GPM). There will be a slice at 60-70% GPM, a piece at 50-60% GPM, a piece at 40-50% GPM. Each of these slices is a different size, the the higher GPM slices being significantly smaller than the slices of lower GPM’s. It is very, very difficult to change a market space. You and I are not that powerful. Really.
Your price to the street is only one lever/input, the two other important ones being your manufactured cost and what unique differentiating features and benefits your product has. More important than the latter there is whether or not your customers think those differentiating F&B’s are important to them. Only then will they pay you more for those unique F&B’s. That is why we are all about the questions here in The Attic! Ask your customer on the front end if those differentiators are important to them and then ask if they will pay more for them.
Market share at any price is a Pyrrhic victory at best and is very dangerous to have as a sustainable strategy.
Here’s where people began messing the market share grab thing up. They believed that if they dropped the price to gobble up market share as rapidly as possible that the PIMS theory would hold. It doesn’t. Parts of it hold (e.g. economies of scale because if you have the highest market share you should be able to get the best pricing from your suppliers, etc), but not all. Whenever you do multivariate analysis and regression analysis of sales, you’re going to screw the pooch by missing unobservables. Within General Electric, the study was valid and many postulate this is because of what? Guess. Go ahead, guess.
Management and culture! Cannot copy either of those, can you. Strong source of competitive differentiation and sustainable advantage, that management and culture!
Every scientific study done on PIMS in the last twenty years has shown there is a diminishing marginal return as you increase market share. Moreover, there is an optimal market share in each market space for each participant in that market. There are times where it is more profitable to give up market share. Really!
Throw a little Nashian gaming theory in there and you are going to lose a lot of money in a relatively short period of time. You think the other folks in your market space are going to sit there and watch you gobble up market share? Heck no. They are going to come back at you and then the toilet starts flushing. Never consider your pricing decisions in a vacuum. Always consider what the other people in your market space are going to react. They will react.
Competing on price is easy and the least bright of any monkeys can do it. Choose to join me in not respecting those that primarily compete on price. In fact, let’s call them wussies to their face. How tough is that? How challenging? And how rewarding is it to that sales person when the customer calls and says “Great news! We chose you because you cost less!” I have not heard that in twenty three years and I’d be hard pressed to think of anyone on one of my sales teams that has ever heard it.
Price does not matter.
Do not start a price war.
No one wins a price war.
Click here to buy the Harvard Business Review case study mentioned above. If you are in sales and marketing, you want to own this. It’s $7.00.
You still here? Cool! That means you are truly engaged and an apt pupil and my hat is off to you. If you want to go deep on this, look up Jacobson and Aaker’s work from the mid 1980’s through now. I stumbled across them a while back and they have some good stuff.
Another really good one is John Dickinson’s work at the University of Windsor. He takes Jacobsen and Aaker and includes gaming theory. I love me some gaming theory! And Hostess snack cakes, too. Man, but I love me some Hostess snack cakes!