Playbook for Competitive Price Engagement
Sun Tzu wrote that “The best victory is when the opponent surrenders of its own accord before there are any actual hostilities… It is best to win without fighting.”
As it is with international engagements, so it is with company-competitive engagements.
Anthropologists have identified a relatively consistent pattern in the structure of ancient civilizations. Whether we are speaking of Persian, Greek, Roman, Mayan, Incan, Medieval European or Medieval Asian societies, civilizations tend to have a core, tributary (semi-periphery) zone, and raiding zone (periphery).
The civilization core houses a concentration of ministers of state, military forces, national goods and treasures, technological assets and progress, cultural prestige, and religion, along with a privileged few. The tributary zone is noted by its military subjugation and provides the raw materials necessary to maintain the civilization in exchange for some level of protection. Finally, the raiding zone is just that: a place to raid, be raided by or engage with competing civilizations and tribes.
Sun Tzu would likely state that it is best to avoid directly engaging the raiding zone unless it can either be won and held peacefully or else engagement cannot be avoided.
Company Market Structures
Similarly, it can be argued that many companies serve three market segments: natural, competitive, and opportunistic.
The natural segment would be the set of customers which the company can serve better than its competitors. This would result from having a differential benefit that serves a specific segment better than all competitive offers. Due to its offering superiority for that market segment, the company should dominate its natural market even when competitors make relatively large price concessions to penetrate a company’s natural market. As such, the company can hold prices at a relatively steady level and is unlikely to need to make major price concessions to drive sales.
The competitive segment would be a set of customers which the company can generally, but not always, serve as well or better than its competitors. This could result from having a partially positive set of differential benefits and a relatively competitive price point. Competitive forays into the competitive market may, but not necessarily, drive price changes. Prices of offerings that engage the competitive are likely to vary somewhat, although not as erratically as they might in the next segment.
The opportunistic segment would be a set of customers which the company serve no better than its competitors, and perhaps even serves worse. This would result from the company’s offers being undifferentiated from its competitors. With a lack of offering differentiation, prices drive sales (specifically low prices). In a market segment where the lowest price wins, few companies are able to dominate for long. A company is likely to suffer bloody engagements in the opportunistic market segment.
Competitive Engagement Playbook
Given these insights, managers have developed a pricing playbook for engaging competition.
For strongly differentiated offerings sold to the natural market, these executives focus on holding prices high and steady as they know (believe) customers will purchase their offerings regardless of competitive price moves. Think of it as selling Porsches to the wealthy: no one has ever reported seeing Porsches on sale.
For weakly differentiated offerings sold to the competitive market, these executives watch the prices of their competitors and change prices as trends and patterns emerge that indicate price changes are necessary. They believe customers will dynamically make tradeoffs between offerings but other factors (relationship, brand, location, etc.) will contribute to some level of customer decision-making lethargy, which allows time for a well-considered approach to price changes. Think of it as selling Audis to the well-off: sometimes Audis go on sale, but rarely.
For undifferentiated offerings sold to the opportunistic market, these executives generally try to track competitor’s prices and match them up to a point, sometimes taking a risky approach. In general, executives will define a minimum margin to accept for products serving the opportunistic market. As long as they can get a price above that set by the minimum margin, salespeople are directed to sell. While this is generally the rule, it isn’t always the rule. At times, when inventory is heavy or plants are way under capacity utilization, executives may lower the price simply to move offerings. At other times, when executives perceive a coming shortage in the market and suspect prices will increase dramatically, they may raise prices in anticipation of the future shortage and hope their forecasting proves correct. Think of it like selling a Seat or Skoda, two more commodity-like brands in the Volkswagen portfolio, to people in Eastern Europe, or like selling paper products in Venezuela today.
While Sun Tzu and the rest of us would all prefer to compete only in our natural market with highly differentiated offerings, he and the rest of us know that this is not always a reality. Consider wisely how you treat your competitive market segment and be prepared for unexpected tactics when you must engage your opportunistic market segment.