Tag Archives: business model

The madness of price wars

A great post from Neil Hopkins on the excellent Interacter blog.

His opening comment brilliantly sums up a business truism that many companies consistently fail to remember.

“Opening a price battlefront is NOT the way to secure your future.  Competing on value is.”

It doesn’t matter whether this is in retail, airlines or corporate business. The maxim holds.

The last thing any company should be doing is to initiate a race to the bottom. A war in which all players may lose. That is not to say that being competitive on price is not important, and that pricing isn’t a critically important part of the marketing mix – of course it. Leading on price though is incredibly risky, perhaps the last ditch throw of a failing company. If you don’t believe me, have a look at the companies offering the biggest discounts, then count the ones that are in business in a year’s time.

Leading on price though is one of the most misunderstood strategies in business and one which is at the heart of many company failures. So lets get the reason for this stated right at start.

You do not win on price leadership – you win on cost leadership.

This is a distinction that many experienced strategists and marketers often fail to understand. Or if they do understand this, they fail to understand the logical implications of this.

In its most basic form:

  • Cost is the total sum that you incur in getting your product into the customers basket.
  • Price is what the customer pays.

From this simple definition we can logically determine some key rules:

  1. Everything that you do in your business impacts cost
  2. Reducing price without reducing cost lowers margins
  3. Reducing price below cost means that you make a loss

So, it also means that:

  • Reducing costs increases margin

    and

  • Increasing price increases margin

Of course, both lists are caveated with (assuming sales are constant), but you get the basic idea.

So how does this impact profit and performance:

  • If you want to reduce prices, you need to reduce costs if your margin is not to reduce.
  • If you reduce prices, but do not reduce costs, you need to increase sales to offset the reduced margin
  • Even if you increase sales to offset the loss in margin, your profitability is decreased as you need to increase revenue to deliver the same margin
  • Increasing sales will be possible for small increases, but larger increases will require additional investment [more stores, more flights, bigger warehouses, more people etc etc] (which again impacts your cost)

Starts to get complex doesn’t it … and this is only at the level of GCSE Business Studies.

So, reducing prices risks undermining your whole business.

I’m serious. It is that fundamental.

So faced with price competition, what should you do?

Neil’s article gives the answer here too. Win on value.

This is not simple to deliver in reality, but it is the correct answer.

How do you win on value? There are a thousands of  small possibilities – giving you  millions of combinations. What you need to do is understand which of these matters to your customer and focus on delivering these. Don’t do all of them (you cannot, but if you try then your costs will rise too high to make you unprofitable), but don’t do none (your competitors will invest, redefine service or product norms and your customers will defect).

Difficult? Absolutely. This is certainly in the hard bucket.

So where do you start?

  • Go through your whole operation and understand how each step adds value to the customer? Boring name (value chain analysis), hard work, but essential.
  • Examine whether you can do this more efficiently? Have you tested new ways of working? Can others do this better. Can you cost effectively improve it?
  • Look for opportunities to eliminate steps that are not needed, or to redesign those that are.
  • Monitor how other industries are innovating. Will these drivers affect your business?
  • Review and refine your customer listening processes? Are you listening to customers? Can they tell you what is not working and what they want to improve?
  • Know what your customers want better than the competition – then do it better.

And the most important one … START NOW.

You can avoid starting a pricing war, but you may still be dragged into one. In the current climate this is much more likely as failing business take a final throw of the dice to try and save their businesses.

Three tips to (be prepared) to survive pricing wars:

  1. Do not compete head to head in a race to the bottom if there is any other option. If a competitor business is failing, customers will notice this too. Whilst this will attract some bargain basement hunters, many customers will avoid the business. Focus on winning these customers. Sell to the values that your customers care about. Remember that price is only one of these. Instead of reducing prices, can you improve services without increasing prices [thereby increasing value]?
  2. Drive costs out of your business NOW. Don’t wait until you have to, because by then it is too late. If you have to compete on price, be able to retain workable margins and keep your business afloat. Know where you can reduce costs if you need to, even if you haven’t. Don’t underestimate the impact that reduced margins will have on your business.
  3. Remember that market leaders innovate – not just in what you can see, but what you cannot. Examine your business operations and look for efficiencies. I don’t mean getting rid of old John Smith in the warehouse – look for opportunities to work more intelligently. Even in the smallest business, examine how long tasks take and whether you can speed this up, automate it, or remove it.

 

If you see a business say that it is going to lead by reducing prices, look to see whether they have said how they will achieve this, and how they will manage reducing margins and lower profitability? If you see no sign of this, then the business is likely to be in trouble and is throwing the dice for the last time. If they have a plan built on operations efficiency, intelligent processes and innovation, then get worried, because they are not lowering pricing, they are lowering costs … and this does work.

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HMV part 2 … Waterstones

If you didn’t know, the people who own HMV also own Waterstones, the bookshop. So are they in the same position as HMV?

The problems and pressures facing the company are very similar, but in my opinion there are some differences, sadly for Waterstones not enough to counter a strategy of denial and inaction.

Neil from Interacter responded and asked about my thoughts on Waterstones. Here is the reply post:

[Slightly with some additional detail]

Agreed on HMV. Dead unless they change, and I don’t think they will change enough. The evidence so far is denial of the inevitable. If you work at HMV, print out these comments (I doubt they use the Internet!!) and leave on the desk of exec team with a post it note saying “read this if you want to have a job in 12 months”. Seriously. Do it.

Waterstones … interesting. Here is why. I’ll stick to 5 points.

1) Experience: Waterstones ‘gets’ experience much better than HMV does. It could do much more in terms of being more social, focusing on the environment (more chairs, changing book layout [to show covers, not just spines], and adding more tablet layouts with recommendations, bit is a league ahead of HMV. So, overall a C+ or even a B-, but it needs to push the boundaries more. Drive card benefits more, incorporate social media better and KNOW ME and reward me. In terms of people – generally good. People in Waterstones love books, but needs to better publicise and leverage the expertise and knowledge that it has. The people are a huge asset, so use them better. I like Waterstones, but I don’t love it. That is your challenge. Make me into a raving, passionate fan. Also, get serious about technology. Book finders need to be much better … and be accurate. ‘We may have that book’ is useless. Sort out your stock control. RFID could help here with tracking. INNOVATE! The website is is need of a major haul as well. One example, one of the best sellers of the year, Steve Jobs book has NO bookseller comment or review!!! This shows that Waterstones website is about flogging books (and is not great at that). What it needs to be is a place for those passionate about books to learn, connect, explore AND BUY! Website marks: 1/5, almost no social media, no external links of reviews, limited information, nothing to attract me to explore deeper, no seasonal content that I want to read. Completely generic selling site.

2) Pricing: This is a joke at Waterstones. Full price for everything outside of discounted top sellers (or it feels that way). In many cases this means up to TWICE the price of Amazon. This is unsustainable as a business model. It doesn’t need to be a discount retailer, but full pricing is not sustainable when my iPhone can scan the barcode and allow me to order from Amazon in less than 10 seconds. The solution – REWARD ME – as a regular purchaser and BIG book buyer. You don’t need to be the cheapest, but also, don’t rip me off. I recognise I need to pay more to have the book now, but if the cost is less than £2.80 (the cost of Amazon postage), you will lose my business and I will wait until tomorrow. If I have Amazon Prime, good luck – no chance.

3) Stock: Needs some real thinking and innovation here. Where are the special editions, smaller publishers, local content, self-publishers? INNOVATE. Amazon is building relationships directly with authors … what is Waterstones doing? They have a huge asset in the shops to use this. The online/offline experience needs fixing. What happens if they don’t have the book in stock that I want? Once I ask about this in store you need to offer to ship to me next day and match Amazon pricing on this. If you don’t, then you don’t just lose the sale, you lose the customer. When I last looked, the speed was from years ago … “we can get that book in 6 weeks”?? Really?? Or I can order on Amazon and have it at my house tomorrow. Start with some core use cases and nail these. Embrace technology – fix the supply chain, but innovate. Where is ‘print on demand’. Waterstones should list 20 million books in each store and be able to supply any one in an hour. Is ‘print on demand’ the answer? I don’t know, but supply chains measured in weeks are certainly not. HMV should have nailed this too, but with downloads growth, this may be too late now.

4) Business model. Needs to innovate and build loyalty much better. What about returns, buy-backs, selling my books for me? I don’t have the answers, but see no innovation from Waterstones in this area. The model needs to evolve – not completely reinvent, but evolve. Try new things and test concerns locally. Empower managers to try things. And whilst I am talking about local managers – give them responsibility for the store. Allow them to innovate, to invest locally, to build connections with customers. I have a more social experience in Starbucks with its book groups and community events than I do in Waterstones!!! Wake up. Start small, engage the community.

5) Long term future: Much harder to call than HMV. The problem is the business model is changing from underneath it, and I see no response from Waterstones that gives me confidence. The pressures are the same as music (i.e. supermarkets, online, electronic channels), but there is a greater affinity and love for bookshops, so there is a window to change. Books will endure, but bookshops may only exist in niches, so Waterstones needs to define what a big retailer can do and show the way. Learn from Borders. The writing is on the wall unless you make these changes. Borders in the US was kicked into touch by Amazon, but at least today Barnes & Noble is surviving. It embraced technology, innovates, discounts and builds strong loyalty through a reward scheme. Its online presence is well integrated and they are driving social strategy … so what is Waterstones doing … not all of this, in fact almost none of it.

Conclusion:

Same problems as HMV – dying business model and an unwillingness to boldly innovate. Without a willingness to change, the outcome will be the same as Borders. Even more than HMV, I really hope this doesn’t happen. The ball is in their court though. Lets hope they start to make changes now rather than do what HMV has done and ruin the brand and the stores.