Price wars and continuing price segmentation
Q: We heeded your marketing Rx on what we should do about a competitor who offered his multivitamins at a steep discount. As your column had prescribed, we did not lower our price to match our competitor’s but instead introduced an economy price brand. We’re happy to tell you that while our premium brand suffered an 18-percent revenue loss, our economy price brand was able to earn an 8-percent entry market share that practically recovered our 18-percent revenue reduction. If we are able to raise our economy brand’s market share by even just 2 more percentage points, then we will more than make up for the 18-percent revenue drop.
But we’re now faced with a new price competitor: TGP, or The Generics Pharmacy. Our sales people tell us that TGP’s multivitamins are retailing at 50-60 percent lower than our economy price products. We never anticipated that participating in the economy price segment would risk our getting into a price war. Please let us know what we should now do.
A: Do not panic. Let’s think and diagnose by doing serious and careful reality checks.
First, you are assuming that TGP is in the economy price segment. On the other hand, you are in two price segments: the premium price segment where your original brand started, and the economy price segment where you recently gained entry. You have to check if TGP’s multivitamins are actually in the economy price segment.
Remember that your economy price brand is 50-60 percent cheaper than your premium price brand. You had verified that the “competitor” with products 50-60 percent lower in price than your premium brand was not your competitor in the premium segment but in the economy price segment. That was why it was wrong for you to cut the price of your premium brand to match that of the lower priced competitor. The correct competitive strategy was for you to enter the price segment where that lower priced competitor belonged.
In the economy price segment you’ve just entered, sales people are crying “price war” against TGP. Ask yourself, how can TGP afford to price its multivitamins at 50-60 percent lower? It may be that its supplements are in an even lower price economy segment—that’s the subeconomy market segment.
If this is true, TGP is not a competitor at the economy price segment. Your appropriate competitive response to TGP therefore is not to lower your economy brand’s price but to have another product entry. This time, enter the subeconomy price segment.
In my 2010 book, “Segmenting: How Market Segmenting, Self-Segmenting and Desegmenting Are Changing the Marketing Game,” I said that, based on segmentation research, “you will be left behind by competition in a market that’s segmenting into three or four market segments with differing priority product values if you do not participate in those three or four market segments.”
There’s a second important reality check to do.
Two or three market segments are truly different if, and only if, the priority product values of consumers in each segment are substantively different. The emphasis here is on the concept of “priority.”
The values may be the same but it is in their order and/or magnitude of importance to the consumers where the difference is found.
For example, consider this specific case of your multivitamin product: All multivitamin brands are talking about basically the same, but sometimes contrasting values of “quality” and “affordability.”
To consumers in the premium price segment, research tells us that their first priority is quality. Affordability is of secondary value. For consumers in the economy price segment, the priority is reversed: affordability comes first while quality is secondary.
What about the subeconomy consumers? They’re like consumers in the economy market segment. Their priority value is affordability with quality as a secondary consideration. But their emphasis on affordability is at a much higher level or at a much bigger magnitude than that of the economy consumer.
So to validate if indeed TGP represents a multivitamin in the subeconomy price segment, combine the much lower price factor with the priority value difference in magnitude of preference in favor of the affordable value. Once validated, do not lower the price of your economy price product. Instead, enter the subeconomy price segment with another multivitamin.
This is the way to avoid a price war. Everyone eventually loses in a price war, including the consumers. No marketer can just go on lowering its price without, near some threshold point, sacrificing some quality. And consumers will know, and once they know, they can be, and will be, unforgiving. They will abandon your war-participating product. But the larger risk is, if they extend this purchase decision to your brands in the other price segments.
Keep your questions coming. Send them to me at [email protected].
