August 21, 2013

Don’t Compete On Price – Also Known As Why I Failed My First MBA Marketing Project

small business financialsI 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.

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9 comments on “Don’t Compete On Price – Also Known As Why I Failed My First MBA Marketing Project

  • Whiskey River BBQ on said:

    Thank you so much for this article. It just so happens that my product launch is scheduled for September 1 and I know that my price point is going to be an obstacle I will have to sell around. I have focused more on the type of product we offer especially in the over-trended market of barbecue foods, the way we produce our products and the ingredient choices that separate us from the “Big Boys of BBQ”. I can completely relate to this topic and found your advice to be very useful and reassuring that my approach to my product launch is right on track.

    Thanks, Stephanie

  • Jim Lewis on said:

    We have an artisan bakery in Jackson Hole, called Persephone, which has baked items so wonderfully delicious, that they don’t even post prices in their display window. There’s a small menu pasted to the wall, but I’ve never bothered to looked. There are other bakeries in Jackson, but the closest competitor to Persephone is in Paris, France. The quote by Philosiful is so true.

  • anonymousvoiceja on said:

    This is dollars and sence. Dangerous to compete on price, especially when your competitors can cut prices based on lower cost to deliver etc. Always differentiate with product quality, service supremacy and ofcourse compete on price.

    • smallfoodbiz on said:

      You bring up a great point that service is another area where entrepreneurs can far outshine competitors (especially these days!). Thanks for sharing that thought.

  • jeffreyschim on said:

    The internet and social media is really a great tool a small business can add to their marketing arsenal. People want to do business with other people they know on a more personal level. Use that to your advantage to reach out to people in your local market and connect with your target market.

    Make sure you show you face in your marketing assuming you are comfortable with that. Just like Jennifer does on her About page .

    Developing that personal relationship helps you pivot away from the focus on price.

    • smallfoodbiz on said:

      That’s a great point – focusing on the ‘personal’ and the ‘story’ does take the emphasis off of price and helps customers build a connection with you and your brand. Thanks!