How to win a pricing war
Competing on price is one of the oldest tricks in business, which means that if a competitor tries to undercut you there are lots of proven strategies you can follow to avoid getting pulled into a race to the bottom.
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If you’ve been in the vegan market for a long time then you’ve possibly had it quite good up until now. Veganism was a real niche. Few businesses bothered with the sector because the mass market wasn’t there, meaning companies were able to carve out a good business simply because they were the only people selling what they sold.
If you were the first to service your market (what we call having a first-mover advantage) then you might have only found a small but fiercely loyal customer base, where the price of your product wasn’t the main consideration. But over the last couple of years so many companies have launched new vegan products and services. You only have to 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. This means is that, no matter how good you’ve had it until now, 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 might have seen the astronomical valuations of companies like Beyond Meat or the number of units that Oatly are shifting at the moment and think that 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 your business is making a profit, it’s only a small one – and a competitor coming in and undercutting you means that you’re scared you might see your earnings wiped out completely. You might even think it’s the end of your business because you know 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.
So what do you do if someone starts selling what you sell but doing so at a fraction of the price? The first thing NOT to do is 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 at a higher price just to match someone who’s completely new to your market?
In business you need to make a profit. If you don’t 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 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. However, there are lots of ways that companies can bring the cost of their product down whilst retaining the same or better profits. In fact, as many companies grow they are often 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 yourself then that doesn’t mean you should automatically drop your prices because of it. 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 new comes into your market and undercut you on price, how do you respond?
Don't have a knee-jerk reaction and just drop your prices to match. Why just throw away the profit if you’ve proven customers will buy at a higher price, just to match someone who’s completely new to your market?
There are three tried and tested responses to someone competing with you on price, based on the circumstances and what position you already hold in the market. So the first thing you need to do is establish what those circumstances are. You already know how much profit you are making (or your should!), but what about the competitor? If you know your sector well then you can probably take a good guess of how much profit your competitor is making by how much you know it takes to bring that product to market. But (and this is an important but) they might have found a better and cheaper way to do what you do, meaning you need to be certain. You need to start snooping around.
Competitor research is the art of finding out all the things about a competitor that they don’t want you to know. You need to know how many staff they have got, who their suppliers are, how they make their product and 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? You want to know who’s involved with the business, how many customers they have got and 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.
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. Feign 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 – if you’re in luck, the representative of the company will happily divulge all the inner workings of their business if they think they are speaking to someone who is interested in spending money with them. How many times have you done that with a keen an interested potential new customer yourself? 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?!
The second thing you need to know is what the market’s view of your product is compared to your competitor’s. Is your offering better quality or does it help your customers solve their problems better? Do you have a brand that customers recognise and trust whereas the competitor doesn’t? 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? All successful businesses know their customers inside out, they make them their best friends! And if you have done this too then you’ll already have a good idea of where you sit in the market in terms of quality and recognition. If you don’t know, then get on the phone or on set up Zoom calls with your customers and find out.
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 you can respond to someone undercutting you on price:
Scenario one: If your competitor is making a lower profit-margin than you and your product is better in your customers’ eyes, then do nothing. Simply continue to monitor what the competitor does but you probably don’t need to respond with your own pricing. 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. However, they are going to struggle to win them if you already have an established market position where your product is seen as better, and 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. Any 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. 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. If this is the case with your competitor but your product is still seen as being better or more desirable in the eyes of the customer, then consider making a moderate pricing reduction to reduce the gap between your competitor’s price and your own. You don’t need to match their price, but doing this makes the customer’s decision to try the unknown competition less likely and reducing your price per unit may be a fair exchange for not losing as much market share in the long run.
Scenario three: 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 there. 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 take the thing that gives their product an advantage and add it to your own to mitigate it – just go out and steal their thunder before they even get a foothold.
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 who were being lured away by the new chat room 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 head-start you’ve already built up in the market to either copy or counter that. If you have the recognisable and established brand in your market but your competitor has a killer feature that makes them more attractive, then if you introduce that killer feature too then they have simply lost any advantage.
If your competitor is making a lower profit-margin than you but your product is better in your customers’ eyes, then they will need a lot more customers than you do to make it worthwhile but are going to struggle to win them from you. Don't drop your prices, just leverage your market position to make sure they have a really miserable time!
And this is important, because if you’re reading this and you currently have the luxury of not having any real competitors then you need to be using this time to cement your position. You can’t just sit on your laurels, you need 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 authority in the industry so that anyone else would struggle to even be taken seriously against you.
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 know others can make a similar product but others can’t match their brand – so they re-positioned themselves not to compete for customers who are making decisions based on price.
On the flip side, once you have this knowledge you can use it to enter a new marketplace or take on a competitor yourself. You will start to spot how big companies use these pricing strategies themselves. When Disney launched into the home streaming market with their Disney+ platform, they knew that consumers would not see them as being as good as Netflix so they undercut Netflix on price. Disney have the cash reserves to play the long game and spent that time working on gaining an advantage over Netflix that would make them more attractive to customers: namely by buying Marvel and Star Wars to provide content that fans would recognise and Netflix couldn’t replicate. 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. Oatly retains its first-mover advantage and continues to work hard to keep it. You would be a fool to try and out-Oatly Oatly. Many have tried, copying the quirkiness of the brand, but most haven’t got anywhere near the same results. Those who have stolen some of Oatly’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 Oatly. But they have only stolen the customers who were always going to jump to cheaper options as soon as there were good enough options – those people were never really Oatly customers in the first place. But Oatly continue to grow regardless, mainly down to the work they did before the others entered the marketplace of cementing their position. And while there’s a number of companies innovating in the market and bringing out new products like potato milk (which is seen as a more sustainable option to Soya and Oats) all Oatly would have to do is bring out Oatly Potato if one of those product really took off and any competitive advantage is gone. But why not let the other companies build up the acceptance of drinking potato and pea-protein milk first?!
Let’s have a bullet point recap of what we’ve just covered in this article:
- 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 this time to really cement your position as the market leader – even if you’re a market leader in a market of just one single provider.
- Some companies actually raise their prices to differentiate themselves when faced with competition. It’s not a lightly-recommended strategy 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.
- 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!
- 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 let them burn themselves out. 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, consider making a moderate pricing reduction to reduce the gap. The competitor will be settling in for the long-term, so reducing your price now 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 to steal their thunder. - 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 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.
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