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Undercutting Competitors' Prices

Businesses based on the idea of providing less expensive products and services to customers can be extremely competitive. One problem such companies face is that the customer base is not loyal and will rapidly switch to another company depending upon what is on sale.

Companies that successfully occupy low-cost niches frequently have many resources and a large size to weather these rapid switches by customers. They may be so large that the cost of a competitive company entry keeps the number of potential competitors down.

Example

United Parcel Service has its own fleets of planes, custom-designed delivery trucks, and distribution centers, which keep competitors from easily entering the market and obtaining a price advantage.

While UPS is known for its low rates, it is also widely regarded as one of the best service companies in the world. UPS strives to create sources of business uniqueness (product differentiation) to maintain customers in the face of price discounts from competitors. UPS has well-trained personnel and service at all levels (e.g., instant computerized answers to customer inquires). It also provides free computers, printers, and other automated equipment to customers as an added service, which again raises the cost of competing with UPS by a competitor.

On the other hand, UPS is also "infamous" for rough package handling. The UPS package "drop test" requirement for package strength and interior construction is a vulnerability in their product differentiation. Companies that ship fragile items like computers, glassware, and liquids often chose other carriers, even at higher expense. Thus, there may be a niche for smaller companies to enter the package delivery business, if they can provide "kid gloves" treatment of packages.

In some cases, the market may be large enough for only one company to occupy the niche. For example, a low-price general clothing store chain might locate its stores in low-income Chicago neighborhoods. There are not enough customers for more than one chain of this type in the Chicago market. However, a would-be competitor might try to copy this formula in another city.

The best protection for long-term success, where low price is a cornerstone of your product differentiation, is to:

  • Be the first company to preempt this low-price niche.
  • Have a unique idea as the basis for your product or service business.
  • Surround low price with as many secondary sources of product and service differentiation with your competitors as possible.