The Real Costs of Lowest Price
You’ve heard it before and you’ll hear it again. According to many marketing professionals, competing on price is a losing strategy. Yet it seems everywhere we look, advertising pitches goods and services with a proposition based upon price advantage. To remain competitive on this front, brands must push their costs lower, in turn demanding the lowest price from their suppliers creating an endless downward spiral. With a keen ear, we’ve noticed that a lot of terrible things happening in the world have been rooted in a low-cost focus. So we have to ask ourselves, how low can we go? What costs will we consider to be greater than price? At what point will we demand to pay more for greater assurances of quality? Just think of these recent examples:
BP, of course
We couldn’t overlook one of the greatest disasters of our time because once you look past the vast destruction of the spill, what is unanimously cited as the root cause of the spill is an over-emphasis on cost reduction ahead of safety.
Tata
A bold new car from Tata Motors proclaimed itself the least expensive production automobile at just $2,000 to the delight of many, yet once on the road it was clear that turning the ignition could literally ignite the car. Great visual aid, that photo of the car in flames!
Toyota
Once lauded for it’s value and safety record the brand suffered significant damage with a string of massive safety recalls in 2009 and 2010.
Indeed many products cost less now than they did years ago. Technology has streamlined processes, opened up the world’s labor forces and cut the costs of doing business. At the same time comparison shopping and price transparency have turned the lowest price proposition, once a marketer’s differentiator, into a consumer addiction. This price transparency, you could say, is forcing even the brands in the premium space of each category to compete on price. All of which has lead many to proclaim this the age of the consumer. Yet it seems consumers are in fact less satisfied across a variety of categories than they were in the past. While we’ve gained price advantages, we seem to have lost many of the consumer experiences that create satisfaction and loyalty.
Now of course we all like to save some cash, but is the lowest price model still sustainable for marketers or the world? I don’t think so, here’s why:
- You simply can’t win on price.
There’s always a provider of the lowest price widget, but it’s never the same provider for long. New entrants, promotional discounts, varied business models and a variety of other influences are constantly changing cost models for each company in a unique way. As a result, the lowest price position is never held by one company indefinitely. - Innovation is expensive.
In virtually all businesses profit is made by delivering on a principle product or service for which there is a known consumer demand. The consistency of this revenue stream allows companies to make their fulfillment efficient, increasing profitability and then allocating a part of that profit to innovation. But downward pressure on the price of the primary product or service can affect the allocation of budget between innovation and quality. - Businesses are like sharks, they have to keep moving or they die.
If a business can’t innovate its days are numbered. So when budgets are tight and it’s quality vs. innovation, it seems safety, regulatory adherence, best practices often take the cut despite the risks. - Loyalty is based on quality.
Once customers believe that quality has been lost and price is the only USP, loyalty will be gone forever. We often think of quality customer service as an under-appreciated marketing channel for this very reason. - Without loyalty, revenue becomes inconsistent.
Inconsistent revenues often means that the core customer has walked away and the primary revenue stream is subject to the turbulence of too many external factors, threatening investment for either quality or product innovation. - Tight margins turn problems into catastrophes.
Without a focus on quality and loyalty, shortcomings become catastrophes very quickly. Catastrophes are very expensive and often insurmountable.
But that’s just my opinion.
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August 9th, 2010 at 10:37 pm
Some thoughts:
When companies compete on price, one of the first things to go usually seems to be the customer experience. For instance, the more airlines compete on base ticket price the more they have to unbundle their product: checked bags, carry-on and food are no longer rolled together but paid for separately. This creates the feeling of being “nickeled and dimed.” From the cost side, in my mind lower cost does not necessarily equate with efficiency or innovation: if something is cheaper because of cheaper inputs (labor, raw materials), all that happens is quality suffers (sometimes by a lot, sometimes by a little).
That said, I wouldn’t deny that in some instances aiming for lower costs could drive positive innovation.
-N
August 9th, 2010 at 10:40 pm
Ad age wrote on a related topic today as well:
http://adage.com/article?article_id=145296
August 9th, 2010 at 11:00 pm
AdAge just ran a story today (http://adage.com/article?article_id=145296) about high-profile quality control failures (they mention Toyota, Johnson & Johnson, of course BP) plus a bunch of others… but the message this time is the dent this makes in brand equity. I suspect we’ll start to hear more discussion about whether investments in quality assurance are in fact a sound marketing practice. Given the close affinity that customer service and marketing have for one another, seems kinda obvious, huh? Hindsight is always 20-20, of course.
August 10th, 2010 at 8:44 am
Costs are not the basis of a strategy, but the result of putting into play. If, when implemented, the strategy fails, it is the strategy that is flawed, not that the costs are too high. The most prevalent source of corporate failure is management’s conviction that their costs are of line rather than their strategy.
If costs are then regarded as the linchpin of a marketing effort, simply a measure of the monetary effort to execute, then strategic thinking is superfluous. In short, costs are inputs required to achieve an output. The choice of output is the task of strategy, not vice-versa.
Furthermore, all genuine strategies imply a degree of differentiation – but costs cannot be differentiated. Costs are different because strategies are different. Thus the investment and choice of a marketing strategy precedes the estimate of costs.
Lets apply this theory to the real world. Toyota is the cost leader in its industry, not because of its ruthlessness of its cost cutting but because of the radically original assumptions underlying its production system. Its costs are the outcome of its operations strategy, not vice-versa. When Toyota deviated from their strategy it was forced to implement a global safety recall, at a cost of 1.6 billion dollars.
August 10th, 2010 at 10:16 am
Thanks Matt, good points, all. But there is also something be said for the power of ‘Brand Cheap’ too.
Rather than protest to offer the same services as competitors for a cheaper rate, some brands are happy to position themselves as cheap and not-so-good. This is because often people are happy to forgo the extra stuff if it saves them some cash. Airlines are a great exponent of this, such as Ryanair in the UK and Southwest in the States. When you think of these brands what is the first thing you think of? Rubbish, but cheap. But at the end of the day, all an airline really has to do is get you from A to B, and so we still fly with them. If you Google ‘cheap flights’ (in the UK), Ryanair is the fifth organic search listing and doesn’t even show up on PPC, but it doesn’t matter, you would still click on Ryanair. That is the power of the brand, ‘Brand Cheap’.
A great example of this in the UK was Dixon’s, who recently ran ads about department stores like John Lewis and Selfridges, which they admitted had better service, but were more expensive, leading to the self- depreciating tag line: “Then go to Dixons.co.uk”:
“Step into middle England’s best loved department store, stroll through haberdashery to the audio visual department where an awfully well brought up young man will bend over backwards to find the right TV for you. Then go to Dixons.co.uk and buy it.”
August 12th, 2010 at 2:14 pm
Competition is not merely about price, it is sometimes about perceived value. Of course most goods and services can be provided at ever decreasing costs, but it is a given law of economics that a point will be reached when lower prices can only be achieved by diminishing quality, thereby destroying the customer experience. This is why all successful companies invest a great deal in innovation to generate novel ways of delivering their goods and services in a way which customers perceive as greater value and enhances their experience.
August 13th, 2010 at 8:55 am
Sadly this story is common in many mature industries you look at. It is almost an inevitable function of the market lifecycle: as the market grows, the competition is focused on growth strategies, innovating to get ahead of everybody else. Then, as the market matures and growth is harder to come, everybody looks to increase profitability through cost efficiencies and rationalisation. It normally takes something pretty dramatic to shake things up – a change in the macro environment might break down the barriers to entry and bring in new competition (e.g. the advent of the internet!) or perhaps a bolder leadership might take the helm at one of the “old guard” (look at what O2 have done in mobile, stealing a march on Vodafone – I actually remember reading an article on O2 saying that, at the time, they were not willing to spend a bean on tactical, price-led advertising because the opportunity for cut-through and differentiation was to talk about the brand – and mobile is as price competitive an industry as any!).
Interestingly, I was in Peru recently and the quality of the airlines I flew with there (LAN and Peruvian Airlines) were much better than it is in the UK. I wonder whether those standards will be maintained as the market starts to mature.
August 13th, 2010 at 3:06 pm
Price-fixation is very much a sign of the times for me, especially here in the UK. In all walks of life consumers are looking for what they consider to be ‘a bargain’ but that tends to be relative to their social/economic status. Bearing that in mind, brands need to be ever-mindful of exactly who they’re talking to/trying to talk to & having a conversation that makes relative sense. A pound shop is a pound shop is a pound shop but it will never replace quality, value, ethics & style!
August 18th, 2010 at 1:25 pm
I often pay extra for things I know are a better quality. Cheap things are often so for a reason, though quality doesn’t always mean paying the highest costs.
There is normally strong middle ground in most markets that I tend to look at.