062 - How to win a pricing war
What to do when a competitor undercuts you on price. If you’ve been in the vegan sector for a long time then you might have enjoyed not having much competition. Now that veganism has entered the mass market though, you might find yourself in the position when a new competitor comes into your space and tries to undercut you on price.
It’s easy to panic when this happens (especially if you don’t have a lot of profit in your business in the first place!). But competing on price is one of the oldest tricks there is in business, meaning there are lots of proven strategies that you can follow instead of getting sucked into a race to the bottom.
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Hello and welcome to episode sixty-two of The Vegan Business Tribe Podcast with myself David Pannell, co-founder of Vegan Business Tribe. And if you have a vegan business, or are thinking of starting one, then Vegan Business Tribe is here to support and inspire you not just to build a vegan business, but to build a SUCCESSFUL vegan business.
And thank you very much for joining us again, I love catching up with you each week on the podcast and I also love all the messages we get sent in from people who listen. And what I would add to that is if you are a listener to the podcast but you’ve not engaged with us in any other way, so if you’re a lurker as one of the other listeners recently described themselves, then do reach out to us and let me know you are a listener. Send us an email at firstname.lastname@example.org and tell me a little bit about your vegan business – or even just your idea for a vegan business – because there’s a good chance we might be able to help or point you in the direction of other people you might want to link up with. And that’s because a big part of what we do at Vegan Business Tribe is connecting people. We know how isolating it can be running a business sometimes, especially a vegan one, and our Community Hub is full of our members collaborating on projects and giving advice and support to each other at the moment.
But another reason to surround yourself with other people who are on the same journey as you are, and people who are maybe a few steps ahead of you on that journey, is so that you don’t have to try and reinvent the wheel when you hit an obstacle. And this is a phrase you might have heard me say a number of times, but if you hit a problem in your business then that problem is only new to YOU. It’s likely that many other people have had to overcome the same problem and have plenty of advice on how to solve it. That might be how to hire new staff, it might be how to find more customers or it might be simply how to ship your product when it needs to be kept frozen. There are likely thousands, if not tens of thousands, of other companies out there that have had the same problem you’ve just hit and there are tried and tested solutions to it – and part of your job as a business owner is to go out there and find them.
And the reason I’m talking about this today is because we always get members asking for help at Vegan Business Tribe and whenever we can, we do what we can to offer our advice and experience. And one recent call for help came from a member who found a new competitor had come into their market and was undercutting them on price – so what should they do?! Should they drop their prices to match?! Could they even afford to do that? Or was it time to sell up and get out of the market because they didn’t think they could compete at that price?
Now, if you’ve been in the vegan market for a long time then you’ve possibly had it quite good up until recently. Veganism was a real niche, few companies bothered with the sector because the mass market wasn’t there. So we saw companies that were able to carve out quite a good business simply because they were the only people selling what they sold. You only have to go back a few years to hear stories from vegans about how they had to drive ten miles to a certain health shop that sold oat milk or used the Vegan Society’s Vegan Shopper, or Animal Free Shopper, book as their bible to find out where they could actually buy vegan products in the UK. So if you were the first to service that market (or had what we call a first-mover advantage) then you might have only found a small customer base, but it was a fiercely loyal one where the price of your product wasn’t always the main consideration.
But over the last couple of years, so many companies have launched vegan products. In fact, you only have to go look at the plant-milk aisle in your supermarket to see huge dairy companies competing with vegan-owned start-ups – all fighting for the same shelf space – to get an idea of how competitive the plant-based marketplace is becoming. So this means that at some point, another company is likely to take a look at the niche you’ve built up and think: I’m going to have some of that! They have seen the astronomical valuations that companies like Beyond Meat have got, the number of units that Oatly are shifting at the moment, and think they want to get into the vegan market too.
And if you have been enjoying a certain market all to yourself, then having another company aggressively enter it can cause panic. It might be that although you’ve created a business that is financially viable, it’s only just so – and a competitor coming in and undercutting you means that you’re scared you might see your profits wiped out completely. You might even think it’s the end of your business because you can’t drop your prices to match.
And if you find yourself in this situation and that’s your first line of thought – then, first of all, don’t worry – it’s natural. But second, if you think that your customers are only buying from you because of your price – then you need to have more confidence in what you’ve built.
I always say that competition doesn’t really exist between vegan businesses. Even if you and I sell the exact same thing, we are happy to co-exist because we’re all on the same mission. We’re all trying to bring about a vegan world. But sometimes competition is more direct than that, it’s not about co-existing, it’s about another business actively competing to take away your customers and their spend. And one of the most common ways of doing this is to simply sell the same thing at a cheaper price to try and entice customers to buy your product instead of someone else’s. M
So what do you do if someone does this to you? What do you do if you see a promotion for a new company selling what you sell, but doing so at a fraction of the price? Well, the first thing is not to have a knee-jerk reaction and just drop your prices to match. Even if you CAN afford to, why would you just throw away the profit if you’ve proven that customers will buy from you at a higher price, just to match someone who’s completely new to your market? There’s a lot to learn about pricing strategies, but as I said at the top of this session – you don’t need to re-invent the wheel. Competing on price is one of the oldest strategies there is in business meaning there are lots of set and proven strategies that you can follow instead of panicking. If you go to business school then you will study modules on pricing strategies. It’s something I was taught when I was doing my marketing degree back in the 90s. So the very first thing to do is to learn about how other companies have successfully responded to this situation.
In business, you need to make a profit. As uncomfortable as you might be with that, if you don’t make a profit you’ll soon not have a business and you’ll no longer be able to help us move the vegan cause forwards. And if dropping your price means you don’t then make a sustainable profit then it’s not an option open to you. It’s also very easy to reduce your price, but then very hard to put it back up again. Every customer will welcome a price reduction but if you get it wrong and then try to claw that money back, you’re going to have a hard time convincing people when you put your prices back up again. There are lots of ways that companies can bring the cost of their product down whilst retaining the same or better profits. In fact, you do find that as companies grow they are able to reduce their prices to become more competitive. They might invest in their manufacturing processes so that they can make more products at a lower per-unit cost, or they might be able to negotiate better deals with suppliers as they gain more purchasing power. But if you are able to do this, then that doesn’t mean you should automatically drop your prices. If you have proven that plenty of people will happily buy your product at the price you are already selling it at, then investing in new production facilities or enjoying the benefits of economy of scale should be used to give you financial stability first and put some money in the bank, not so you can just give those profits away. Getting dragged into a race to the bottom on price is never a great business strategy.
For example, iPhones are now cheaper for Apple to make per unit than ever before, they have seen more and more competitors enter the market at lower and lower prices with very comparable products, yet Apple’s retail prices continue to go up! Since its launch in 2007, the price of a new iPhone has gone up by 80% as competition has gotten ever greater.
So if someone has come into your market as a new competitor and are undercutting you on price, then what do you do? Well, there are THREE tried and tested responses based on the circumstances and what position you already hold in the market, and the first thing you need to do is establish what those circumstances are. You already know how much profits YOU are making, or your should, but how about the competitor? If you know your market then you can probably take a good guess of how much profit your competitor is making by how much they are selling at compared by how much you know it takes to bring that product to market, but they might have found a better and cheaper way to do what you do so we need to be certain. We need to start snooping about.
Competitor research is the art of finding out all the things about your competitors that they don’t want you to know. You need to know how many staff have they got, how many mouths do they need to feed in their business. Who their suppliers are, how they make their product, how and why they are coming to market cheaper than you are. Is it a deliberate strategy or are they just naive and going to go bust in six months? Who’s involved with the business, where are they getting their funding from? And the easiest way to find out all this information? Well, you simply call them up and ask them.
And this might sound like a ridiculous thing to say. But make it your first line of enquiry – call them up pretending to be a potential customer and ask them outright how come they are coming in so cheap when everyone else is more expensive. Ask them questions about their operation as an interested potential customer. Fein interest in how many people they have working for them, ask them how long they have been going and encourage them to tell you their story – the amount of times I’ve spoken to representatives of a company and they have been happy to divulge all the inner workings of their businesses because they thought they were speaking to someone who was interested in spending money with them. And if you think that calling up a new competitor pretending to be a customer is unethical, then I guarantee that they have already done it to you. It’s the first thing they will have done when researching the marketplace – why do you think they are now undercutting you?! It’s not just coincidence that all their products are 25% cheaper than yours.
The second thing you need to know is what the market’s view of your product is compared to your competitor. Is your offering better quality, is it going to help your customers solve their problems better? Do you have a brand that customers recognise and trust whereas the competitor doesn’t yet? Do you have good first-mover advantage? Have you built up a defendable position in the market because you were one of the first in it? Again, you should already know this because you’ve heard me saying so many times before that you need to make your customers your best friends! And if you have, you’ll already have a good idea of where you sit in the market in terms of quality and recognition. But if you don’t know, again get on the phone or on the Zoom calls with your customers and find out.
And once you have all this information you’re then in a position to decide what action you’re going to take. And there are three ways to respond to someone undercutting you:
Scenario one: If your competitor is making lower profits than you on their product and your product is better in your customers’ eyes, then do nothing. Simply continue to monitor what the competitor does but you don’t need to respond. If they are coming in at a lower price by cutting into their profits then they will need a lot more customers than you do to make it worthwhile, but they are going to struggle to win them if you are already in an established market position. That first-mover advantage is something you can really leverage to make sure they have a really miserable time. So instead of reducing your price, focus on keeping yourself in that position. Focus on customer relationships, interaction, marketing and brand building to continue to make it extremely hard for them to win customers away simply on price. No one is ever going to lure away an iPhone customer by trying to sell them a cheap budget phone. The customers they do win are those where price is the only thing they are buying on so don’t think of them as your customers anyway, they were always going to leave as soon as they found something cheaper.
Scenario two: If you know that the competitor is making a good profit selling at the lower price then they will be likely to be planning to settle in for the long term. It’s also the same if the competitor has large cash reserves or can afford to sell at a loss for a period of time because they are backed by a larger company – and you usually see this with big companies entering new marketplaces, they exchange selling at a loss for a long period of time to get a foothold. So if this is the case, but your product is STILL better or more desirable in the eyes of the customer, then consider making a moderate pricing reduction to make the gap between your two offerings closer. This makes the customer’s decision to try the unknown competition less likely. You don’t need to match their price, but reducing your price per unit may be a fair exchange for not losing as much market share in the long run.
The third scenario is the one you want to act quickly on. This is when the competitor is selling at a lower price but still making a good profit (so maybe through economies of scale for example, or they have found innovative and disruptive new ways to bring a product to market) and at the same time they have some other competitive advantage over you. For example, their product is demonstrably better or has some benefit over yours other than price. If this is the case then the time you have before they start siphoning away your customers is dependent on how quickly they can get their message out. So either you need to start innovating to bring your cost of sale down – and again, do everything you can to find out how they are able to deliver such a good product at such a low price and consider just copying them – or simply look at the things that are giving them their advantage and add them to your own product or service to mitigate that advantage. Just go out and steal their thunder.
This is why large companies often buy up smaller ones that disrupt them or find an advantage over them and add them to their own service. It’s why Twitter launched their own group voice chat function that they called ‘Spaces’ to counter people lured away by the new functionality of Clubhouse. But again, it’s not a time to panic – it’s simply a wake-up call that someone has found a better and cheaper way to solve a customer’s problem and you need to use the advantage you’ve built up in the market to either copy or counter that. If you have the recognisable and established brand but your competitor has a killer feature that makes them more attractive, then if you have that killer feature too they have simply lost any advantage.
And this is important, because if you’re listening to this now and you do currently have the luxury of not having any real competitors challenging you then you need to be using this time to cement your position. You can’t just sit on your laurels, you need to use this time to become so entrenched and synonymous with your market that anyone else would think several times before thinking they might launch a business against you. And that barrier to entry might not just be the product you sell, it might be your overwhelming knowledge of the industry or that you yourself become such a recognised authority that anyone else would struggle to even be taken seriously against you.
As I said, getting dragged into a race to the bottom is never desirable unless your entire business model is to pile them high and sell them cheap. It’s no surprise that many companies respond to competition entering their market not by dropping their prices but by putting their prices up to differentiate instead. Like Apple, they knew others could make a similar product but others couldn’t match their brand – so they re-positioned themselves to not compete for customers who are making decisions based on price.
But on the flip side, you can also use this knowledge to enter a new marketplace or take on a competitor yourself – and you will start to spot how big companies use these strategies themselves. When Disney+ launched into the home streaming market they knew that consumers would not see them as being as good as Netflix, so they undercut Netflix on price (because being Disney they have the cash reserves to play the long game) and spent that time then working on gaining an advantage over Netflix that would make them more attractive to customers. Namely buying Marvel, Starwars and National Geographic to bring high-quality content and value that fans would recognise to the platform. And as soon as Disney’s research shows them that the consumer now values the platform as highly as Netflix you bet they will put their prices up to match.
So can you apply this same knowledge in your own marketplace? Take a look at plant milk. Oatley retains its first-mover advantage and continues to work hard to keep it. You would be a fool to try and out-Oatley Oatley. Many have tried, trying to copy the quirkiness of the brand but most haven’t got anywhere near the same results. Those who HAVE stolen some of Oatley’s customers are the supermarkets who have been able to use their economies of scale and buying power to bring out oat milk at a third of the price of Oatley. But they have only stollen the customers to who were always going to jump to cheaper options as soon as they were good enough options – those people were never really Oatley customers in the first place. But Oatley continue to grow regardless, mainly down to the work they did before the others entered the marketplace of cementing their position. We’re seeing a number of people innovating in the market and bringing out things like potato milk which is seen as a more sustainable option to Soya and Oats, but all Oatley would have to do is bring out Oatley Potatoe and that competitive advantage is gone. But let the other companies build up the acceptance of drinking potato and pea-protein milk first!
OK, so now you are armed with this new knowledge, let’s have a quick round up on how to respond if a competitor tries to undercut you on price.
1. When you hit a problem in business, you don’t need to reinvent the wheel to solve it. Find others who have had the same problem and learn how they overcame it.
2. If you’ve been in the vegan marketplace for a long time then you might have had it good and enjoyed little competition. That never lasts, so use that time to really cement your position as the market leader – even if you’re a market leader in a market of just one!
3. Some companies actually raise their prices to differentiate themselves when faced with competition. It’s not a strategy I’d recommend lightly, but if you are the Apple of your market then you might follow a strategy of driving your prices up instead of down if your customers value your product way more than the price they pay.
4. If a competitor undercuts you on price, don’t have a knee-jerk reaction and try to cut your price to match. First, find out everything you can about that competitor and how and why are they coming in at such a low price – are they even making money or are they going to find themselves going bust in six months? Be a secret shopper, call them up pretending to be a potential customer because I guarantee they have already done this to you!
5. There are three standard responses to being undercut by a competitor depending on the scenario. First: if your competitor is making low or no profit and customers regard your product as better, then do nothing. Let them burn themselves out because they need far more customers than you do and you’ve already got the head start. Focus on cementing that position and give them a really miserable time. Second: If the competitor is making a good profit selling at a lower price but again the customer believes your product is better, then consider making a moderate pricing reduction to reduce the gap. The competitor will be settling in for the long-term, so reducing your price per unit may be a fair exchange for not losing as much market share in the future. And third: if the competitor is selling at a lower price and also has some advantage over you, so is seen as being better in the eyes of the customer, then you need to react strongly. Find a way to match them on price or find a way to negate their competitive advantage – maybe even by copying THEM before they even get a foothold to steal their thunder.
6. You can also use these strategies to go after competitors yourself. Just being able to make a product cheaper will not win customers from an established competitor. Find out what you can do to make your product better at that cheaper price that they can’t easily just copy, disrupt them so that you can deliver something that they would struggle to or find undesirable to do so. Start to actually strategise how you are going to take a company on – don’t just hope customers will start using you just because you are cheaper.
And that’s it. So as always, if you found this session useful then do head over to veganbusinesstribe.com where ou can find lots more information like this, and even engage with myself, Lisa and the whole VBT community. Being a member of VBT doesn’t just give support to your business – it lets us support all vegan businesses and helps us skill up the vegan business scene. If you join us, it’s your £12.99 a month membership that helps us put this podcast out every week, gives you access to all our events and community and also helps us keep championing the vegan business scene worldwide. All for about the same as you would pay a month for a cup of coffee every week from your local coffee shop.
So thank you so much for giving up your time to join us; Lisa and I, we really appreciate you giving up your time each week to listen. Hopefully, we’ll meet over on the website soon and I’ll see you on the next one!