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MAY 22, 2000


Jack Trout: Why Price Cutting Is a Poor Marketing Tool

From "Differentiate or Die: Survival in Our Era of Killer Competition"

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Price is often the enemy of differentiation. By definition, being different should be worth something. It's the reason that supports the case for paying a little more -- or at least the same -- for a product or service. But when price becomes the focus of a message or a company's marketing activities, you are beginning to be perceived as being unique. What you're doing is making price the main consideration for picking you over your competition. That's not a healthy way to go.

Few companies find happiness with this approach for the simple reason that every one of your competitors has access to a pencil. And with it, they can mark down their prices any time they want. There goes your advantage. As Michael Porter says, cutting prices is usually insane if the competition can go as low as you can.

To support Porter's premise, we point you to a startup company that came up with a unique packaging system for baby carrots. It was one that produced a decided price advantage over the two big suppliers already in the business. To get on the supermarket shelves, they entered the market not with better carrots, but with a better price. Instantly the two big suppliers matched the upstart's price. This only forced the new company to go lower, which once again was matched by the established brands.

When a board member asked the management of this startup to predict what would happen, the management predicted that the two big companies would not continue to reduce their prices because it was "irrational." They were losing money because of their older packaging technology.

The board member called us about this prediction. We advised that it was perfectly rational. Why would the two companies that dominated the market make it easy for a new company with a manufacturing price advantage to get into the market? The were quite happy with things the way they were.

At the next board meeting, the startup company's management was encouraged to sell their new manufacturing system to one of the established brands. Which they did, for a nice profit. Everyone was happy, and another low-price strategy bit the dust.

GETTING AROUND PRICE
Market leaders will always be attacked on price. It appears to be almost a law of nature. So what do you do? Do you have to match all their moves that are made against you? Well, there are some tried-and-true methods of getting around a price attack:

1. Do something special. The leader can go to its biggest customer and offer something special. Nike went to Foot Locker with Tuned Air, a $130 running show that they make exclusively for the big shoe retailer. So far, so good. Foot Locker has ordered more than a million pairs.

2. Cause some confusion. In some industries, pricing can be quite complicated. Some years ago, MCI launched their Friends & Families discount program. The deal was discounts on those calls you made to your friends and families as well as to those that were made to you. AT&T ignored this for a while, but MCI's market share started to climb. Eventually, AT&T introduced "MCI math." This aggressive ad program challenged those MCI rates as not being very much when you got past the small print (the 20% discount shrunk to about 6%, which worked out to pennies on a phone call.) AS the arguments raged, the market became confused about what was a real discount and what wasn't. Other discounts from Sprint and a new breed of telephone discounters only added to the confusion. MCI's market share progress was halted. Who wins when the market is confused? You guessed it: the leader. People just figured, "Why bother? Let's stay with AT&T."

3. Shift the argument. Introduce the concept of total cost as opposed to initial cost. In some categories, the costs you incur after you buy a product can be substantial. If your product performs better after the purchase, you might be able to build a cost of ownership versus cost-of-purchase argument. An expensive product, such as a Mercedes, can have a high price, but it will last longer than your average car.

WHAT ABOUT PROMOTIONS?
Do price promotions do much for a brand? Some extensive international work has shown that sales generally go back to where they were once a short-term promotion is over. A promotion is taken up virtually only by the brand's long-term or loyal customers. The evidence shows that people seldom buy a strange brand just because its price is cut. They simply avoid paying more than they have when one of their customary brands is temporarily on sale. That's why there are no after effects on sales: A promoted brand does not hang on to any new customers because there were virtually no such "new customers" to speak of.

DIFFERENTIATING WITH HIGH PRICE
We're far more impressed with companies that use a high price to help differentiate themselves. Joy perfume announces that it's the "costliest perfume in the world." There are two important principles at work here:

1. High-quality products should be more expensive. People expect to pay more for a better product, but the quality should be visible in some way. A jar of Orville Redenbacher gourmet popping corn looks a lot more impressive than a less expensive can of Jolly Time. It also promises the benefit of popping almost all the kernels. My Rolex should look sturdy and substantial. But a lot of watches at a fraction of the Rolex price look sturdy and substantial. This raises the next point:

2. High-priced products should offer prestige. If I've spent $5,000 for a Rolex, I want my friends and neighbors to know I'm wearing a Rolex. It's how they know I'm successful. So it is with expensive cars. While they will never admit it, the reason people spend $50,000 for a car is to impress their friends and neighbors.

Excerpted from DIFFERENTIATE OR DIE by Jack Trout.  Copyright 2000 by Jack Trout.
Reprinted by permission of the publisher John Wiley & Sons, Inc. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical or otherwise without prior permission from the publisher.  To order a copy of this work call 1-800-225-5945, or visit the Wiley web site at www.wiley.com.


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