Competing with free
While some may only grudgingly admit it, competition is good for business. The presence of competitors means that there are plenty of paying customers around. Also, by creating choice, competition forces you to compete for your customers’ attention and money, which, in turn, improves your focus on what it is that makes your business and its products unique and valuable to your customers.
Equally, competition results in better business practices. By watching what your competitors do, you can learn about their business and, in turn, learn how to make your business more efficient. Having competitors in the market means you must continually stay one step ahead, which has a very positive impact on innovation and consumer demand.
But not all competition is good – or, at least, certain types of competition can be very bad for business.
The most dangerous competitor is one whose primary competitive tool appears to be aggressive price competition, either rapidly moving prices down or, worse, selling products or services below cost, in an apparent effort to win sales volume.
How can your business compete with an ‘irrational’ competitor who offers equivalent products or service below cost or for free?
The first step is to return to the basics of competitive strategy, which is defining your business goals and objectives. As Michael Porter has observed:
“Economic value is created when customers are willing to pay a price for a product or service that exceeds the cost of producing it. When goals are defined in terms of volume or market share leadership, with profits assumed to follow, poor strategies often result.”
Smart businesses shoot for margin, not sales volumes and market share. While huge top-line numbers might appear more impressive, Year 9 maths belies the myth of market share: it is just as profitable to sell 1,000 widgets for $50 with a $5 margin as it is to sell 5000 widgets for $20 with a $1 margin.
Where you face intense (even irrational) price competition from one or more competitors, it is important to refocus your efforts on developing a value proposition that delivers a benefit, or set of benefits, that is different from that of your competitors and that creates unique value for a key set of customers.
Refocusing your efforts to target consumer segments for which you are able to create unique value, or which fall outside those segments targeted by price-driven competitors, will require strict discipline.
Usually it will involve making a series of trade-offs, such as ceasing development of certain product features, or abandoning certain market activities. The end objective is redefining your value proposition to avoid head-to-head competition with price-oriented competitors, and shifting your focus to those customers’ needs for which you have a competitive advantage in addressing.
It is also important to understand the underlying cause of the competitor’s apparent ‘irrationality’. It may be that the competitor is merely responding to competitive moves by other businesses – including, perhaps, yours.
You should review your recent market initiatives to determine whether they triggered the problematic response. You should also review how you are communicating your business’s strategy to the broader market.
Very few business leaders are, in fact, irrational, and if your competitors are able to mark out a discrete section of the market to play in, without going into head-to-head competition, they usually will.
Adapted from ” Competing with Free” by Mark Neely.