August 21, 2013
I was in a brand consult meeting last week where we, 3 experienced food industry folks, talked about some of the changes happening in the industry. One company in particular came up in conversation and we talked about how their sales had taken a huge hit because “someone came in at a lower price”‘ It reminded me of my first ever MBA Marketing assignment…which did not go too well.
First, My Miserable Marketing Project
The business school I went to teaches primarily using case studies which means students are provided with a business case (aka – 30+ page document) which looks at the history of the business, where it stands today, and what problems/challenges it’s trying to overcome moving forward. Your job is to read through the material and essentially come up with a plan of action – including financial supporting documents in most cases – on why the company should follow the recommendation you’ve laid out. In most cases, business cases are built off of real companies and real issues they faced in the past.
In my first ever MBA Marketing class we were given a case where a company was bringing a new product into a highly competitive space (I want to say it was aspirin, but I may be confusing it with another marketing case study). Our assignment was to determine how that new product would be positioned given that it was fairly similar, for all intents and purposes, to every other product already on the shelf. How would we convince the customer they needed to switch brands?
Being a new, overeager student, I immediately thought I saw what was the most obvious answer. We should simply undercut our competitors on price. Granted, that means we’d have to take a little less profit on each product sold (since our costs were fairly similar to the costs of our competitors) but so what, we’d surely make it up in volume as customers switched from other more expensive brands to ours.
The Current-Day Company’s Dilemma
The company we were talking about is a medium-sized regional player who does produce their own product. While the product is not a commodity, it’s also not so highly differentiated that someone else isn’t already making a pretty tasty version of the same thing. So when Company A came to market they decided that they’d offer their product at a lower price than everyone else.
For a while that worked, they were the low-priced option and people did flock to them once they realized that their product was pretty much more-or-less the same as the higher-priced competitors.
Back To My Marketing 101 Mistake
Not unlike Company A, I believed the case-study company needed to go with the lowest possible price and that – combined with an advertising budget to help get the word out – would lead to a growing share of the marketplace.
And then I got my paper back with a nice big F on it. Ironically, as we later discussed in class, the case-study company had been thinking the same thing I was and they did go to market with price being their biggest differentiator. That all went well for a year or two until one of the other competitors got fed up and decided to price their product’s even lower. And so began what’s known as ‘the race to the bottom’ where companies are willing to give up profit margin in order to gain a bigger share of the market.
The Lesson I Learned
The F was an important lesson that really came into play when I was running my own small business – don’t let price be your differentiator. You need to price your products in a way that does make sense based on your costs and with price points that your target market will be willing to pay, but you can’t simply let price be the reason why people should buy from you versus another competitor. That’s a very dangerous game and at some point someone may decide to take you up on that challenge and price even lower than you. Then what?
This is exactly the problem that Company A is now facing, their sales sliding because another competitor came in with a lower-priced product that’s taken all of their business. Since they’ve never competed on anything other than price – never once calling out their superior products, better taste, more unique flavors, etc. in any of their marketing – they’re having an extraordinarily hard time trying to convince customers to stay with them. And why should those customers stick around? They’ve found someone who, in their minds, offers the exact same thing at a lower price.
For small food businesses, where we lack the economies of scale to produce food products dirt-cheap, making price our main selling feature is a dangerous game to play. You simply will never be able to compete with the mass manufacturers on price because of the efficiencies they’ve got built into their systems because of the volume they do. So don’t try to beat them (or even your closest regional competitor) on price. Instead focus on what makes your product different and better. You certainly won’t attract a customer base who only cares about low prices going this route, but you will attract those who recognize the value in what you’re producing and are willing to pay for it.