New competitor with lower prices!

[amaze]

Hi,

I started an online company 3 years ago from scratch and at the time it was a total niche. The last financial year turnover was just under £2,000,000 and net profit of £360,000. So far this FY we have increased turnover and net profit (from management accounts).

Approx 2 years ago another online company started and literally copied what we have done and even used some of our names for our products with the only difference they cut approx 10% off our RRP prices.

In a counter measure we added a price matching scheme, but I'm still worried alot of customers won't use this feature and will just buy from the cheaper source...

The big question I have should we cut our RRP prices to theirs and hopefully run them out of business (we are a lot better operation over all) and then risk losing lots of margin from our loyal customers who dont know about them or stick with our slightly higher prices and push the "quality" thing...

Of course no one can give me a exact answer but I would be interested in comments or a debat about this as I'm sure its a common problem with successful niche businesses.

Thanks!

 

[Coding Monkey]

What are you selling? You may be looking at it the wrong way around, and trying to sell something cheap, when your clients basis of decision making isn't based primarily on price.

 

[vinyl-grafix]

Without knowing all the details of what you do its hard to say, but I'd imagine a lot of what you are doing is based on a service rather than a product. If it is just a product then competing on price might be important.

The work I do is all tailor made so people pay more for a better service rather than just going for the cheapest option.

 

[amaze]

Hi,

Its products we sell not a service. It will be a big decision, something I have been pondering on for a while..

Thanks

 

[Deleted member 11158]

Hello

First of all, congratulations! You appear to have built a strong company with excellent profit margins - not easy for an on-line business.

Given that things are going so well for you, my question is why do customers come to you? If it's because you are the only supplier then you may be under threat from the new competitor. If it is about something else - convenience, speed, delivery reliability, product quality, other added value services then I would continue to focus on this aspect rather than price.

What feedback do you have from customers about why they buy from you? Are there sub-groups of customers in the market with some more service-led and others more price-led? Can you get more business from the service-led customers if you improve your game in this area to make up for a drop in business from your price-led shoppers?

The truth is that in a price war, it is the person who is prepared to live off the lowest profits that is the winner (or who has a distinctly lower cost operating model). It sounds like that whilst you are more efficient, you are unsure about how low you can go. Given this it sounds like you have a lot to lose.

A thought - John Lewis are currently delivering record profits, even though they operate in highly competitive business areas - fashion, food, electronics. They have a high-service model, but underpin it with a "never knowingly undersold" price promise. Perhaps this can work for you.

Good luck

Stuart

 

[Stephen Berry]

The issue is all about how price sensitive your customers are and the points of difference between you and your competition. It is not a one sentence answer.

At the risk of being self promotional, the 'Strategies of the hippo' chapter (downloadable e-chapter only, £2.50) has 20 pages of advice for this area and uses examples of Mercedes, General Motors, Apple, Bernard Matthews, Virgin, Levi's, Boots.

I am biased, but I would recommend it.
www.StrategiesoftheSerengeti.com

 

[cjd]

All things being equal (as they say), you can only keep a price premium if you have a differentiated product or a developed brand name that gives your customers some further comforts.

Competition is inevitable and the greater the margin available the more you will have and the faster the margin will fall. You have to decide whether you can position yourself as the price leader in your sector keeping a higher price and losing some customers but essentially setting the benchmark and creating stability or to drop your prices to at or below the competition and start a price war.

Price wars amongst equals hurt everybody (that's why big companies always price fix for comodities and don't believe anyone who tells you otherwise). The nod and wink language is 'we have a responsibility to the market'. Which means 'we don't want to hurt each other do we?'

However if you have a war chest and the new companies don't, you could try dropping your price below theirs and hope to take them out. The final blow is to buy them out as they go down. This is a tough tactic which requires nerve, funding and good knowledge of your competion's financial position.

 

[Stephen Berry]

Some good advice from Stuart and cjd - some clues as to how (for example) Harley Davidson secure a premium price for an (at best) average product, why the likes of Lidl, Netto, Aldi operate at the lowest price end, why Matalan have low staff (and therefore cost) levels etc etc.

Take extreme care with the 'buying out' consideration. How difficult is it for someone else to start up as a new competitor (techie speak 'barriers to entry')? If it is easy you'll spend all your life buying people out - but Microsoft do!

There's also the 'stealth and ambush' route - here's a quote about one example:
The US tobacco industry saw an excellent example of stealth and ambush in 2003. On 2 April, Philip Morris slashed the price of its US tobacco brands by a huge 20%. Simultaneously they increased their US marketing expenditure. Rival company R.J.Reynolds were to some extent caught by surprise and had to use ‘follow me’ strategies copying the price cuts throughout the US. In due course R.J.Reynolds had to raise their short term advertising expenditure to deal with initial slow sales. Both companies suffered drastically reduced margins and the smokers of America rejoiced in the lowest prices for some years.

However, the price cut and marketing increase were not the ambush – they were part of a stealth strategy. R.J.Reynolds had depleted their cash reserves in keeping pace with Philip Morris. The latter had built up their financial coffers for this purpose and consequently did not suffer the denudation which Reynolds did. Then, with the rival weakened, Philip Morris sprung the ambush. The US market activity was the stealth activity of denuding Reynolds and weakening their financial ability to respond elsewhere. The real target for the ambush was Russia. Morris pushed $800m of investment into Russia and other former Eastern Block countries and with Reynolds unable to respond, Morris took a commanding lead in the race to secure brand dominance in the emerging Eastern European markets.

 

[realmaverick]

As an online business, where does most of your custom come from?

How does the competitor rank in google?

How likely is it that your customers will even know this other company exists, I know you're aware of them but are they really doing that well?

 

[Cornish Steve]

All things being equal (as they say), you can only keep a price premium if you have a differentiated product or a developed brand name that gives your customers some further comforts.

This is classic business theory (from a guy named Porter), and it's very true. Either you differentiate in some way or you become the low-cost leader. That's it!

 

[Rhyl Lightworks]

Also don't forget that it is possible to sell things too cheap. While some people go for the cheapest possible price, others become suspicious if they think the product is too cheap and there must be a catch somewhere. It is difficult to satisfy both from one retail outlet or website. One possible way round this is to set up another site, so that your original one continues selling the premium product, and the new one offers the same at cut price.
I haven't done this but have been thinking about it. I have found that even when we have 'specials', selling some products at little above cost, the sales of these products show little improvement to normal.
Barrie

 

[Stephen Berry]

This is classic business theory (from a guy named Porter), and it's very true. Either you differentiate in some way or you become the low-cost leader. That's it!

or do both at the same time and capture the whole market - as Apple did with the iPod moving from 1st Generation to 4th (with a little slip up on 3rd generation where they mispriced - and shares/stock fell 20% as a result).

A bit of care with Porter though - all his models and structures are static and cope poorly with a dynamic business environment. However, he gets £10,000 a speech and I get less!