Peter Thiel famously said, “Competition is for losers”.
He may be right, but that doesn’t mean competition does not exist.
If your business is going after a market with many new and existing competitors – and chances are you are – then you can not easily ignore competition.
At the heart of any competition strategy, is the goal to create or acquire advantages – ideally substantial – over your competitors. These are yours moats – the protective layer that keeps competitors out of your home and away from your customers.
For many companies, there are a number of ways to create a competitive advantage. We look at three common and often pursued forms of competitive advantage – technological, operational, and supplier.
The Technology Moat
Businesses that has a technological advantage, creates technology innovation (e.g. proprietary technology, patents) that is either difficult for competitors to acquire or re-create.
It can include technology such as the recommendation engines of Netflix or Spotify, or the formula for a new drug of a pharmaceutical company. Not disconnected to the innovation, is also the product quality. This advantage requires resources (e.g. capital) to acquire, but can have a long-lasting payoff and competitor moat.
The Operations Moat
A second competitor advantage companies try to acquire is an operational advantage. That operational advantage is focused on decreasing the cost of producing and delivering goods or services, by increasing the effectiveness of elements in their operations.
This can include how the supply chain is managed to the manufacturing/production process used to create and distribute product. This competitor advantage has helped companies such as clothing giant Zara, retail leader Wal-Mart, and even startups such as Warby Parker and Casper well. Acquiring this advantage also requires resources (e.g. capital) as well as expertise to design and execute. Done well, this advantage can improve a company’s cost positioning, reduce waste and increase pathways to profitability.
The Branding Moat
A third competitor advantage some companies try to acquire is a branding advantage. This is commonly seen in consumer-facing companies, including clothing brands and retailers. The goal of the branding advantage is to extend beyond a transactional relationship with customers, but create an emotional connection and loyalty. This advantage can decrease costs of customer acquisition – for SaaS companies negative churn – increase the number and frequency of repeat purchases, increase total spend (revenue), and increase customer satisfaction and advocacy. Unlike other competitive advantages, creating a brand advantage is an earned advantage and can take more time to acquire and retain. Once achieved, brands can experience longer term benefit as seen by companies such as retailer Nordstrom, fashion brands such as AllBirds and Patagonia, and video game maker Nintendo.
But these are not the only moat-creating advantages you can build for your business. Entrepreneurs also have pricing
Make Pricing A True Competitive Advantage
Using price to create a competitive advantage is not a new. For many companies trying to make a dent in a new market, price is often deployed to shake up the market and put pressure on incumbent pricing. What this typically has meants lower – sometimes free – pricing.
This pricing tactic can be highly disruptive and lucrative as companies such as Ikea, Walmart, and tech companies such as Zoom and Google have used low prices as a competitive advantage against legacy brands and companies.
When looking at what made the pricing strategies of these companies successful is not just in going low, but how they defended their value even at lower prices and found pathways to new sustainable revenue channels and profitability.
This is important, because for too many companies creating market disruption using low prices is used as a blunt instrument that leave them scrambling to find ways to monetize and defend their worth in the eyes of customers. Not only can this be a costly reality to maintain, but can also result in a pivot that is hard to recover.
Pricing is multi-dimensional and can be deployed in many different ways. The key is in the rigor in planning and execution.
From the years of working with companies at all stages of growth across the world, there are five core questions to consider when deciding how best to use pricing to create a competitive moat.
#1: Do you know your monetizable value today?
This is obvious, but if you are using your pricing strategically, particularly through lower prices and discounts, then it is all the more important to know what the baseline willingness to pay for your product is.
Many companies go low on price without considering what their true willingness to pay is and for what customer segments. This is giving away the farm without realizing perhaps all you really own is the chicken coop. Alterantively, if we want to be more strategic and tactical, we may not have to give away 50% of our customer’s willingness to pay, if we know 30% will due. Anyone who’s had to convince a customer to buy their product will know, each dollar is hard earned so if you don’t have to, don’t leave it on the table.
#2: What is our value defense?
Whether you’re going high or going low, it is important to know how the pricing strategy will be defended. Too many times we have seen companies where the first and last line of defense is (low) pricing.
As any sales professional will atest, you never start the discussion on price; the prospective customers will struggle to hear anything else.
So what price drivers can and must you defend? Who are the value drivers meaningful for?
Pricing is a core inter-connected component of the value proposition and buyer decision, so it is vital to identify and defend those price drivers that shape a customer’s perception of your product.
Consider a new car a customer is looking to buy. What does she consider?
- Price?
- Performance?
- Safetey?
- Financing?
- Trust in the dealership?
- Brand?
- Asthetics such as car color?
- Features such as the sound system?
What factors matter and the relative importance is important to understand what is defendable and what is given away. It is rarely all or nothing.
That said, value is a lot like trust. It is very difficult to gain, but extremely easy to lose.
#3: What are the success factors for our pricing strategy?
It is important not only to execute new pricing, but to understand what are the success factor of the strategy. This requires prepararation ahead of the pricing launch to understand what will be needed to manage successful execution.
In the case of Walmart, their “Everyday low prices” strategy is more than a marketing slogan. The pricing strategy is enabled by a company that knows world-class supply chain and operational excellence is how that strategy will be delivered and sustained.
When thinking about how you will use pricing to create a competitive advantage, consider what factors are required to make the strategy successful.
#4: What alternative strategies can be deployed in the future?
There are two parts to this – (1) as a result of today’s decisions, what opportunities or limitations are creaed; and (2) what other pricing models and approaches are potentially available.
Pricing will evolve as fast as your company and it’s products. So it’s important to consider given the current state, what else can you do with your pricing in the future.
This can be using more complex pricing methods such as dynamic pricing, but will also require the technical backend development and investment to successfully execute.
It can be the development of a mix of pricing models, that will capture revenue and growth opportunities across different buyer groups and use cases. Rarely is the pricing decision an at the moment decision, and will require planning and more importantly research and analysis to support the decision with your team.
#5: What organizational competencies are created?
We often think of pricing from an output perspective (e.g. a price, revenue, profit), but pricing – when done well – is a core competency that is hard to replicate, maintain and execute well.
For all the technical and marketing prowess of companies such as Amazon and Apple, pricing remains a straetgic advantage. The advantage is not only for the price they execute and achieve, but the organizational capability to maintain discipline, and continuously maintain and evolve the pricing. It is hard, which is what sets the best companies apart.
Final Thoughts
Pricing is an effective way businesses can create a competitive moat, but is too often designed and executed like a promotion rather than a strategic decision.
The tradeoff for short-term customer acquisition, are the potential longer term consequences to the business including the dilution of price/willingness to pay, increasingly expensive customer acquisition costs, and limited future pricing options.
Thoughtful planning and design, early and often can mitigate future pricing and proposition challenges. This starts with establishing a willingness to pay baseline for targeted customer segments to craft how the competitive moat will be executed and sustained.
Like any good strategy, maintenance and defense is required. This means we need to measure and modify regularly. If immediate value is given away (e.g. lower prices), then we need to ensure core value drivers are defended and we understand what tactical pricing options are available as the market and business changes.
Like a good cajun roux, if you stop stirring and take your eye off the pot, it will burn making the roux unusable. Avoid the pitfalls to make pricing a true competitive advantage and moat that will position your business strategically for the long-term.
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