Recently, the chairman of Matatu Owners Association (MOA) was quoted in the media decrying the stiffening competition in the sector. According to him, the industry is so saturated that it has turned into a loss-maker. In a country facing high levels of unemployment, duplication of ideas in areas with low barriers to entry is a common thing. Our population is frighteningly young.
Unfortunately, we have only two options to pick from. Either we reap the demographic dividend or we pay the demographic penalty. A demographic penalty can come in form of an army of unproductive consumers. Whether the energy, creativity and talent of our youth is harnessed or not, they have to consume. The only way out would be to export labor, but unemployment challenges and strict immigration policies abound in other countries.
When an industry is crowded, inefficient market practices such as price undercutting play out. Price wars are usually a zero sum game in hitch there are no winners. When prices start coming down, many marketers tend to panic and flow with the price reduction craze.
Theoretically, from an economic perspective, the industry is supposed to correct itself by shedding off the less fit players so that only the strong survive. Economists love the concept of equilibrium because it seems to offer solutions to all manner of challenges. In reality, the crowded market place may be so prolonged that marketers find themselves perpetually operating at the end of their wits. It is such times that the marketer needs to retreat to the theoretical foundations of marketing which add non-price options to the strategy mix.
Tweaking distribution to prop up falling profit margins
When prices hit rock bottom, the game changes from one of margins to volumes.When profit margins reduce from say 10% to 5%, you can make up for the reduced margins by pushing higher volumes. This can be done by adopting new distribution strategies. For instance, a number of mobile phone distributors are adopting online marketing. In fact, some are only distributed via online platforms such as Kilimall and Jumia.
While they still incur courier costs for delivery to clients, they are many savings that come with this strategy. First, it is possible to run such an operation without any need to hold stock. Since these online shops do not have immediate delivery timelines they are able to only source what has been ordered. They save on costs associated with holding stock including storage, financing,as well as risks associated with holding obsolete gadgets in a world where consumer tastes are changing rapidly.
Home delivery as a distribution strategy of products such as cooking gas has helped businesses to develop customer loyalty. Unlike in the past where you would move around looking for the product, now you just take your phone and dial the supplier. This has the impact of turning what was once a mere transaction into a relationship. Furthermore, this reduces customer price sensitivity due to growth in trust. The stronger the customer loyalty, the lesser the need for price comparison.
Playing around with distribution is more about ensuring increased convenience in the consumption of a product. This distracts the clients from focusing on price discounts. The ranging shakeup among taxi service firms following introduction of the tax hailing services by Uber shows that a shift from price to convenience can change the way money is made in an industry. In the past, we used to go to where the taxis were ; now they come to wherever we are. Most importantly, we do not need to be in a fixed location for this to happen.
Combining a good with a service
This is a powerful method of escaping price wars by turning a product from a commodity-transaction orientation into a service-relationship dimension. One of the best example of this is the vegetable value addition services provided by roadside green grocers. While vegetables are mere commodities the additional service of washing and cutting which is free is the one that builds lasting relationships and ensures repeat purchases.
Even in the above example of doorstep delivery, we are still exploring the concept of augmenting a good with a service. In the end, this service can even attract a separate price but customers will be so hooked to it that they will gladly pay up.
If you are selling a service, you can always augment the core one with additional value enhancements. A service like M-Pesa has helped Safaricom withstand low prices by competitors. While competitors have tried to convince customers that their voice services are priced low, they have not presented a credible replica of the M-Pesa service hence customers are unable to shift their loyalty in totality.
Branding strategy to diminish price influence
Branding is a powerful tool in the face of price competition. A strong brand attracts loyal customers. Such customers cannot be shaken by dangling the price carrot. When customers turn into followers and even into believers, low price is often seen as a cue to low quality in line with the saying “cheap is expensive.”
Brand presents a non-price value proposition. By emphasizing on product distinguishing features, customers have a reason to justify paying more contrary to the rational need to buy low. Perceptions of premium quality entice customers to part with a premium price. The best example of this is the iPhone. Even as new phone models enter the crowded market daily, the iPhone still stands out. As far as smart phones are concerned, the iPhone is the undeniable object of ultimate desire.
Zero pricing turns price into a non-issue
One of the strategies which have been adopted in tackling price undercutting is by going the free pricing route. Sometime back, local investment bankers were invited to bid for a contract to provide transactions advisory services during the initial public offering of a blue chip company, one of the investment bankers shocked the others by bidding to provide the services for five cents.
Sometimes, the only way out of a price battle is to do something extraordinary. Today the concept of free pricing has become popular with many firms. When the price is zero what is left as the basis for competition among firms? This calls for a trip back to the drawing board. You have to think hard and re-define price by distinguishing between the one who pays and the one who consumes.
There are local musicians who are in favor of piracy of their music. They claim the piracy makes them popular hence earning them more from shows than they would ever earn from selling the music. Even in the print business, zero pricing is becoming the norm as we are faced with a generation that found news being free on the internet and cannot imagine spending money on a newspaper. When you ask them why they have never bought a newspaper in their entire lifetime, they tell you that there has never been a need to do so.
When price is out of the strategy equation, the natural response involves restructuring the top line by increasing revenues from sources other than those of the core product. It is something worth giving a thought because the importance of price as a strategic tool is decreasing. As scaring as it seems to be, it is never too late to think of a time when what you are selling will be retailing at a zero price. Will you close shop or re-invent your enterprise?
Price has always been a critical tool in marketing strategy. However, changing times have made price less relevant and in some cases irrelevant. Consumers are very demanding and competitors will stop at nothing. How do you stand out in crowded market? Price cannot be a strong distinguishing factor because someone is likely to pop up with a strangely low price.
It is a good time to focus strategy on non-price aspects of competition. Create a strong brand with a loyal customer base. Ensure consumption is as convenient as possible. When push comes to shove, remember that it is possible to think without the box called price. The future belongs to those who are ready to stretch their imagination to the limits and the courage to seize the moment with bold decisions. The era of price competition is gone. Say hi to a new world.