At ManyWorlds, we help executives apply some of the most sophisticated strategies and approaches around. But invariably we come across executives with a lament that is a variation of the following: “Steve — all this sophisticated thinking you guys bring is great, but here’s our situation — we’re in a war with a new competitor that just brings to market a knock-off of our product and then prices it a little below ours. That’s leading to a spiraling commoditization of our industry and our business. So, smart guy, what do we do about that . . .?”
Well, longer-term you need to do something about how easy it is for a competitor to basically just copy your product. But, as the famous economist John Maynard Keynes pointed out, in the long run, we’re all dead! So in shorter-term you need to use the few levers you have — in particular segmentation and pricing levers. The following approach is one Dipak Jain, marketing expert and Dean of the Northwestern’s Kellogg School of Management, has related to us. While not foolproof, it can buy you time to address some of the longer-term issues with product and services differentiation.
First, when a competitor brings to market a product that is similar to your product and then underprices you, your natural inclination is to lower your price to meet theirs, with the expectation that your stronger brand will give you the edge. But resist the very strong urge you have to take that approach! Lowering your price will only cheapen your brand, you’ll legitimatize your competition’s product, you’ll signal to your customers that you have been overcharging them in the past, and you’ll reinforce the commoditization of your business.
Instead, execute what Dean Jain calls a “sandwich strategy” — what I’ll call “pricing judo”. First, add an additional “kicker” to your product to position it as clearly a more premium product than the competition’s product, and raise the price! Then introduce a more economical version of your product and price it at or below the competition’s product. This effectively sandwiches the competitor’s product. The competitor may still gain some share, but the destructiveness to your margins should be blunted.
Every business leader would like competitors that are smart enough to not play the copy and drop-the-price game, as ultimately you both end up losing. But just about every industry has a dumb competitor or two, and so you have to be the smart one and apply the segmentation and pricing judo approach.
Meanwhile, get working on making your products and services impossible for the competition to copy in the first place!
(Guest post from Steve Flinn)