Price leader or price follower? Each has its merits.

Price leader or price follower? Each has its merits.

by Michael Hurwich President of SPMG

If the terms ‘cut-throat’, ‘bitter rivalry’, and ‘open warfare’ describe the state of price competition in your industry it is more than likely that several competitors are challenging each other for the role of industry price leader.

The problem, of course, is that in most industries market share competition is a negative-sum game. There can be only one leader, and until that leader is firmly established, price instability and continual downward pressure on industry margins will persist.

For organizations that optimize their role as leaders or followers, profitability can be dramatically improved by understanding the differences between the two stances.

As the name implies, price leadership involves establishing price discipline in the marketplace while followship means optimizing position behind the price leaders.

While the leadership role may sound like a highly desirable position for any firm to occupy, the fact is that attaining price leadership is expensive, and will only be successful if the leader has a perceived superiority for its products or services in the minds of industry buyers.

Perceived superiority can come from many sources, such as a unique brand image, technological advantage, or high levels of customer service.

Regardless of how it is achieved, perceived superiority creates brand loyalty and lowers the price sensitivity of buyers and this is a foundation of price leadership.

In most but not all industries, the price leader is also the market share leader. For example, Procter & Gamble holds both these leadership positions in many of the markets and categories in which it competes.

Note, however, that market share leadership is not necessarily a prerequisite for price leadership. In fact, in some industries, perceived superiority may require a perception of exclusivity, which is incompatible with a high market share.

Leadership strategies

Successful price leaders employ three key devices to protect their leadership status. Firstly, leaders can exercise their clout over industry buyers to raise the industry price ceiling. In raising the ceiling, the price leader can rely on brand loyalty to minimize customer fall-off. Nevertheless, the leader must be prepared to “bite the bullet” and refuse to budge in the wake of protests from buyers, even at the risk of losing a sale.

The second lever at the price leader’s disposal is the ability to demonstrate discipline to competitors who attempt to undercut them in the marketplace. The key here is to ensure that the demonstration is sufficient to convince the errant firm that challenging the leader does not pay.

Not surprisingly, in order to be effective, the demonstration of leadership can also be expensive. The cost to the price leader of temporarily reducing the price of a leading brand over the disciplinary period can exceed fifty percent of the contribution margin.

The final tool available to the price leader is the communication to the industry at large of the commitment to remain in the role of price leader.

Typically, successful price leaders clearly communicate their intention to retaliate vigorously against any competitor who refuses to follow their lead. One of the most effective methods of communicating this commitment is to establish a pattern of consistent behavior, since past behavior is normally used by competitors as an indicator of future actions.

While price leadership may not entirely define the battleground upon which the competition will be fought, it does identify one weapon that is off limits – price.

Price leadership also implies that the price leader will not use price in response to non-price threats to the leader‘s market share. For example, a price leader will not use price to respond to a competitive line extension or to a successful advertising campaign.

A “tit-for-tat” approach is usually established whereby competitive initiatives are met by appropriately related responses.

An alternative approach

Price leadership, if executed properly, can improve long-term profitability, but as stated before, leadership is expensive to achieve and maintain. Clearly, the strengths required to be the price leader are not always available to every company.

For some, a much more profitable alternative is to pursue a price followship strategy.

Where price leadership entails establishing price discipline, price followship involves a willingness to operate within the established boundaries.

The term “followship” may be repellent to those companies with an intensely competitive spirit and a sales-driven culture. Be assured, however, that price followship is not a “roll over and play dead” strategy. Rather, effective price followship involves an intelligent, disciplined commitment to maximize profitability.

·        The successful price follower is guided by these principles:

·        Match but do not undercut the pricing set by the price leader.

·        Refrain from using tactics that encourage the leader to respond with price.

·        Follow and openly support the leader‘s price increases.

·        Ensure that your pricing strategy is clearly understood by the leader and other competitors.

It is interesting to note that although price leadership and price followship are two very different strategies, the most effective action in executing both strategies is to establish a pattern of consistent behavior.

In the case of the price follower, consistent behavior would involve establishing a track record of such moves as matching but never undercutting the leader‘s prices, and never pursuing one of the leader‘s key customers through price.

It would be naïve to think that a company wishing to make the transition from a would-be price leader to a price follower would be able to do so overnight. It is likely that in the short-term other competitors, especially the price leader, will not trust the firm to behave like a follower, particularly if there is a history of bitter competition in the industry.

Moreover, from an organizational culture perspective, the shift to price followship can be a difficult strategy change, particularly in organizations that are traditionally sales-driven.

The payoff, however, of becoming a successful price follower can be enormous. After all, there can only be one price leader in any industry–and only a handful of companies have the resources and the abilities to be the leader.

For other firms, focusing on increased profitability by being a successful price follower surely makes more sense than continually provoking the price leader with vain attempts to overtake it. 

Successful price promotions: What to do to ensure that you get the desired results

Successful price promotions: What to do to ensure that you get the desired results.
By Michael Hurwich President of SPMG

COMPANIES typically use price promotions to attract new customers to products in their introductory and growth stages. In mature markets, price promotions are designed to maintain volume and profitability. Price promotions can be effective at both the distributor and end-user level and can take many forms. Off-invoice trade deals, sampling and trial pricing, co-op advertising, display allowances, consumer rebates, feature pricing and coupons are typical promotional devices. While promotional pricing can be effective in meeting objectives, there is the risk of triggering unwanted customer behavior patterns.

Here are three considerations to keep in mind to ensure your customers respond positively, over the long term.


1. Keep the ceiling up

Customers do not think in terms of “promotional price” versus “regular price”. Instead, they form opinions over time of what is a “good” price and what is a “bad” price. Aggressive promotions cause buyers to expect a lower and lower price to consider it “good”. As a result, companies can expect lower volume at regular prices since customers will increasingly see them as unfair or “bad”. As a result, the price ceiling will fall. In addition, customers generally remember the lowest price they have paid for a product or service with the result that even a limited time special offer can change customer expectations over the long-term.

What to do:
Avoid excessively deep price promotions. If building volume is the objective, use a smaller discount and run the promotion longer or more frequently. While you may not experience the same uplift as a deep discount, you will protect the integrity of your regular prices over the long term.


2. Encourage long-term customer loyalty

Many companies view price promotions as a means to build a perception of brand value. In some cases, however, price promotions merely equate to an attempt to buy customer loyalty. For example, in the telecommunications industry promotions such as cash incentives often encourage customers to switch service providers. While these types of promotions may be effective in building volume, they do little to retain it. They say to the customer, “It is all right to be disloyal and switch for a better price”, resulting in customer “churn”, frequent switching among suppliers. Over time, these promotions encourage customers to base their purchase decision primarily on price rather than the value of the product and/or service, often leading to commodity type prices. In addition, this kind of price promotion can alienate your current, loyal customers who are not privy to this type of exclusionary discount.

What to do:
Substitute price reducing promotional tactics with promotions that incent consumers to purchase for non-monetary rewards. Promotional gifts and frequent “buyer” credit points are examples. These tactics achieve sales oriented goals while taking the focus away from price in the purchase decision, helping to preserve the perception of quality that surrounds a particular brand. If you feel that you must offer a promotion for switching suppliers, provide a similar incentive to current customers to reward them for being loyal and to help retain the newly won customers.


3. Discourage forward and/or delayed buying

Companies that use price promotions frequently, or during specific times of the year, often find that overall volume does not grow as expected. This is usually because of forward and/or delayed buying. Forward buying means that customers stock-up at the promotional price. Delayed buying involves customers waiting to make a purchase in anticipation of a future price promotion. Over the past 10 years, for example, many cosmetics companies have offered attractive bonus packs to customers. One particular company runs its promotion at the same times in the spring and fall each year with the result that over 50% of its sales occur during these two periods. Customers have been trained to delay purchases until the promotional period and stock up on the product when retailers are offering the promotion.


What to do:
Change the timing, frequency, and depth of your price promotions. Inconsistency will help avoid forward and/or delayed buying. There is no doubt that price promotions, when used appropriately, can be powerful tools in building an effective pricing strategy. However, the key to successful long-term profitable use of price promotions is to achieve an optimal frequency of usage that creates significant volume lifts for the product without encountering any major pitfalls.



Promotion pricing can sometimes be hazardous to the overall value of a product in regards to customer perception and behavior towards purchasing. Successful price promotions rely on an understanding of customer conceptualization of value. By ‘keeping the ceiling up’, ‘encouraging long term customer loyalty’ and ‘discouraging forward/delayed business’ companies can begin to ensure the safety of their product-cost when pricing promotions are deployed.

Knowing when price followship is the better strategy by Michael Hurwich

Case Study


Packaged goods companies have traditionally emphasized market share with the belief that revenue, and profit, will follow. After years of chasing the market leader for share, this case study company refocused on improving the bottom line. Market share stabilized and profit doubled after one year.

Background


At the beginning of the 1980s, Crest was the U.S. toothpaste category leader, in terms of price and market share. Its principal competitor, Colgate, believed it was within striking distance of Crest's leadership and invested heavily in targeted advertising, product improvement and price promotions. For example, Colgate took the lead in product improvements through its anti-plaque formula and developed television spots to appeal to children and young adults. Over the next several years, Crest demonstrated that it was not prepared to cede its leadership status, and Colgate's initiatives were met with strong retaliatory strikes. When Colgate advertised its entire line of oral-hygiene products, for example, Crest directly attacked Colgate in advertising.
Shortly thereafter, both Crest and Colgate began aggressive consumer price promotions to attract new consumers with Colgate offering coupons and —Buy 3 Get 1 Free“ promotions while Crest was sending $1.50 coupons to Colgate users. By 1990 after years of aggressively pursuing Crest, Colgate's toothpaste market share was lower than when it started.

A New Direction


By 1990, Colgate-Palmolive had become increasingly concerned with the reduced profits suffered in its aggressive fight for market share leadership in the toothpaste category. As a result Colgate embarked upon new strategies with the overall objective of protecting margins and increasing profit. Price increases were taken and market share decreased slightly; profits, however, doubled. Colgate, for the first time, was clearly focused on producing profits and avoiding the fight for leadership. Colgate's quest for profit, and not market share, proved to be effective.

Lessons Learned


Brands must have the right levers to achieve and maintain price leadership in any market. Colgate clearly did not have those levers. Colgate did not have the necessary brand loyalty to raise the price ceiling for toothpaste, nor was Colgate able to discipline competitors such as Crest when they undercut its price. In addition, there was no consistent communication or subsequent behavior by Colgate to indicate it could be the price leader. A more profitable alternative for Colgate was to pursue a price followship strategy.
The strong brand equity Crest had earned thwarted Colgate's attempt to increase its market share. When Colgate accepted a second place position in the toothpaste market and changed its focus to margins, profit doubled. By pursuing this strategy, Colgate continued to improve profit while maintaining and even increasing market share.