There are a handful of successful companies that have "won" on price. On its way to increasing revenue to nearly $200 billion in 2001 from $32 billion in 1991, Wal-Mart Stores perfected the everyday-low-pricing business model. Other retailers, like Kmart, tried to match Wal-Mart's low price points only to fail at creating sustainable operating profits. Wal-Mart is one of the rare companies that built sustainable competitive advantage through a commodity-pricing strategy. But pricing alone is not the sole driver of the company's success. Wal-Mart built a distribution infrastructure so advanced and efficient that it can afford to price products for less and still generate healthy margins.
As glorious a success story as Wal-Mart is, establishing and sustaining market leadership through a pricing strategy is a very tricky act to follow. Look at the long-distance business. While long-distance usage has grown 50% over roughly the last 10 years, the long-distance price battle that AT&T, Sprint and MCI waged during the 1990s resulted not in a strong, brand-driven category leader but in the spotty financial performance of all major carriers. Revenue growth has been inconsistent and churn rates remain an ongoing issue.
Unfortunately, the telecommunications industry has been slow to learn from the collapse of long-distance pricing. In wireless communications, for example, every major carrier is currently pursuing a bucket-of-minutes strategy. Prices are dropping like rocks as minutes become commodities and marketers struggle to hold onto market share. In the end, the consumer wins and the service provider is forced to sell either more minutes or more services to grow.
epidemic of promotions
Similarly, satellite dish and cable TV price promotions are an epidemic and are conditioning consumers to subscribe based on price alone. On billboards and newspaper ads across the country, competitors woo subscribers with promises of free installation, free channels and lower monthly prices. This approach is so devoid of marketing imagination that it's no wonder the industry subscriber churn approaches 30% per year. Consumers have been conditioned to shop for the lowest deal vs. more long-term drivers of customer retention like product offerings or service differentiation.
Marketers and CEOs must restrain themselves. It needs to be remembered that price is only one element of a brand's value proposition. By definition, the day price becomes the sole definition of value is the day that a category becomes a commodity. Unless they have a lower cost structure, most marketers that compete on price alone are simply being lazy and cannot expect to build sustainable advantage.
creating brand preference
There is a more strategic way to meet sales objectives and drive stock appreciation and it involves creating brand preference. Building a brand requires creativity and a longer-term horizon for measuring success. It also requires some sacrifices, like losing low-margin customers that shop only on price. But these sacrifices pay off in the long run in the form of customers willing to pay a premium for a brand's point of difference.
For example, it is well-chronicled how Starbucks Coffee Co. seemingly reinvented the coffee category based on the European cafe concept. What Starbucks really did, however, was rejuvenate a commodity category, improving the product and making brands matter again. The next time you purchase a $3 latte, think about how price sensitive buying cans of coffee at the grocery store used to be.
Evian bottled water sets another brand-price gold standard. Evian is the worldwide leader in a bottled-water market that is booming. The market is not booming because of low prices (ounce for ounce, Evian is more expensive than Coke) but rather because of brands. Evian manages to lead while charging some of the highest prices in the category. And this is a category where very little noticeable product differentiation exists from one brand of bottled water to the next.
Finally, hooray for Southwest Airlines for its understanding of how pricing strategy and brand differentiation mutually support business goals. Southwest is synonymous with good value but the brand experience is not necessarily cheap. There are lower-cost providers than Southwest but few other airlines offers a better value. In pricing, advertising and customer service, Southwest simply creates a better brand experience. It's no surprise that Southwest's P/E ratio is above the industry average.
When the price of a brand becomes its primary measure of value, categories risk becoming commodities. As a result, margins generally decline. The next time you find yourself playing the discount game with your competitors, think harder about other ways to enhance the value of your brand through product improvements, service enhancements and good old-fashioned brand building. When price alone becomes the measure of your marketing plan, it's time to re-evaluate the marketing mix.
Peter Murane is president, BrandJuice Consulting, Denver, a marketing management consulting firm specializing in building unique brands ([email protected]).