Nine months ago, Palm introduced its new Pre smart-phone. On the occasion of that introduction, we wrote a blog (See Blog Here) predicting that the Pre would have a difficult time competing in this fast-growing market. It’s problem? Lack of apps. At the time, Apple had 35,000 apps. That number has now grown to well over 100,000. Other competitors today have as many as 20,000 or more apps available. The Pre has relatively few. Its shortage of apps has shown up in its market share. Recently it had 5% of the smart-phone market, a long way behind Apple’s 18% and Blackberry’s 43%.
In response to its failure to generate excitement in the market, the Palm plans to increase its advertising and add 200 company trainers to help Verizon’s sales representatives sell the phones. This won’t work either.
Returning again to the Customer Buying Hierarchy that we use to analyze a market, we recall that customers buy Function, Reliability, Convenience and Price. They buy in that order as well. Customers keep moving through the Hierarchy until they have found a single competitor who can offer them something important to them and that no other competitor can offer. (See “Audio Tip #70: Several Rounds in Evaluation Failures” on StrategyStreet.com.)
Function innovations dominate very fast-growing markets. The smart-phone market has been a very fast-growing market. Function innovations in the form of applications are today’s name of the Function game. If you don’t have apps, you can forget about the other Function innovations in your phone. Today’s competition can copy virtually any Function innovation that resides in the phone itself. Apps are something else again. (See “Audio Tip #97: How Do We Know if an Innovation will Remain Unique?” on StrategyStreet.com.) They require a large installed base, strengths of Research In Motion’s Blackberry and Apple’s iPhone. Application developers have little incentive to design new applications for the Palm operating system when at least three other phone providers, Research In Motion, Apple and Google, stand in front of the Pre and its smaller sibling, the Pixi.
Unless all three of these companies, with far more apps than the Palm phones, fail, the Palm phones don’t have much of a future. No amount of advertising, nor increased sales training, can make up today for a lack of applications. If it is determined to spend its money in what looks like a losing cause, Palm would be far better off buying applications rather than spending money on marketing and sales. Today’s smart-phone is sold by one user showing another all the cool things that the smart-phone can do. That is a much bigger sales force than Palm or even Verizon can afford.
Thursday, March 11, 2010
The Pre Looks to Go Post
Monday, March 8, 2010
Pricing Myths
There is a price war going on in the retail liquor department. This is good news for those of us who enjoy a drink but bad news for the liquor companies.
It seems that consumers have been switching their purchases to less expensive brands of liquor during the recession. They are not drinking less, though. (See the Symptom & Implication, “Low end products are gaining share of the market” on StrategyStreet.com.) The volume of spirits sold in 2009 was up by 1.4%, but the revenue remained flat due to price discounting and consumers shifting to cheaper brands.
Diageo, the world’s largest liquor producer, is part of the industry’s problem. This company has been aggressive in reducing its prices with the two-fold purpose of holding on to their current customers and gaining share against other liquor producers. The falling prices are most obvious with vodka, tequila and gin. Some competitors of Diageo are refusing to go along with the price discount. For example, Patron, the maker of Patron tequila, has resisted the price cutting. (See the Symptom & Implication, “Some competitors seek price increases more aggressively than others” on StrategyStreet.com.) The CEO of Diageo believes that his discounting has helped the company gain market share and retain consumers. Still, his revenues are off compared to the previous year.
The equity analysts believe that price discounting will hurt Diageo’s brand equity. I disagree.
The history of many markets is replete with examples of branded goods who have had to discount during difficult times. Remember Marlboro Tuesday? How about the price wars in the 80s and 90s in beer, disposable diapers, fast food, tires, farm machinery, construction equipment, appliances and personal computers, to name just a few? Companies must respond to shifting consumer preferences and most price discounting.
An industry in overcapacity is certain to experience price discounting. It is true that this causes customers to become more price-sensitive, but that price sensitivity lasts only as long as industry competitors will discount against one another. (See “Video #11: What Ends Hostility” on StrategyStreet.com.) Once the period of discounting has passed, companies regain pricing power and branded equity is as strong as it ever was. For proof, consider the brand leaders in the industries cited in the previous paragraph.
Part of a company’s brand equity with consumers is the fact that the company is viewed as pricing “reasonably” with competitors. If a company will not price with rough equivalence to its competition, it also destroys its brand equity. Consider General Motors in the 80s, IBM in the personal computer market and Xerox in copiers. You don’t want a reputation as someone who prices high just because you believe that your brand is better than everyone else’s. That way leads to big troubles.
It seems that consumers have been switching their purchases to less expensive brands of liquor during the recession. They are not drinking less, though. (See the Symptom & Implication, “Low end products are gaining share of the market” on StrategyStreet.com.) The volume of spirits sold in 2009 was up by 1.4%, but the revenue remained flat due to price discounting and consumers shifting to cheaper brands.
Diageo, the world’s largest liquor producer, is part of the industry’s problem. This company has been aggressive in reducing its prices with the two-fold purpose of holding on to their current customers and gaining share against other liquor producers. The falling prices are most obvious with vodka, tequila and gin. Some competitors of Diageo are refusing to go along with the price discount. For example, Patron, the maker of Patron tequila, has resisted the price cutting. (See the Symptom & Implication, “Some competitors seek price increases more aggressively than others” on StrategyStreet.com.) The CEO of Diageo believes that his discounting has helped the company gain market share and retain consumers. Still, his revenues are off compared to the previous year.
The equity analysts believe that price discounting will hurt Diageo’s brand equity. I disagree.
The history of many markets is replete with examples of branded goods who have had to discount during difficult times. Remember Marlboro Tuesday? How about the price wars in the 80s and 90s in beer, disposable diapers, fast food, tires, farm machinery, construction equipment, appliances and personal computers, to name just a few? Companies must respond to shifting consumer preferences and most price discounting.
An industry in overcapacity is certain to experience price discounting. It is true that this causes customers to become more price-sensitive, but that price sensitivity lasts only as long as industry competitors will discount against one another. (See “Video #11: What Ends Hostility” on StrategyStreet.com.) Once the period of discounting has passed, companies regain pricing power and branded equity is as strong as it ever was. For proof, consider the brand leaders in the industries cited in the previous paragraph.
Part of a company’s brand equity with consumers is the fact that the company is viewed as pricing “reasonably” with competitors. If a company will not price with rough equivalence to its competition, it also destroys its brand equity. Consider General Motors in the 80s, IBM in the personal computer market and Xerox in copiers. You don’t want a reputation as someone who prices high just because you believe that your brand is better than everyone else’s. That way leads to big troubles.
Thursday, March 4, 2010
The Price Advantage of Reliability
We use the Customer Buying Hierarchy to evaluate many developments in a market. This Customer Buying Hierarchy argues that customers buy Function, Reliability, Convenience and Price, in that order, when making a purchase. The customer does not buy until he finds one company who can offer him a benefit in a category of interest to him that no other competitor can offer.
In many markets, leadership in Reliability is the hallmark of the best competitors in the industry. That has been true until lately with Toyota in the automobile industry. Their once vaunted reputation for quality and durability, in other words Reliability, enabled them to command a premium of $1M to $2M on cars priced in the $20M to $25M range. This pricing advantage came about because customers would pay more for better Reliability. (See the Perspective, “Reliability: The Hard Road to Sustainable Advantage” on StrategyStreet.com.)
This is a somewhat incorrect description of how the market actually works. Toyota did not intentionally price its products higher than those of its competitors. Rather, it set its prices and then its competitors determined that they had to offer discounts of $1M to $2M in order to entice sufficient numbers of customers to purchase their products over those of Toyota. This competitive price discount pulled some customer attention away from Toyota’s Reliability, where the competitors were at a disadvantage, to price, where they had an advantage. (See “Audio Tip #68: Producing a Net Value Improvement for Customers” on StrategyStreet.com.) Of course, Toyota’s higher price enabled that company to make good profits while many competitors, most notably the domestic automobile producers, were racking up large losses in the industry.
Toyota’s advantage in price is slipping away quickly. Some analysts have estimated that prices for the Toyota cars on recall have fallen from $500 to $1500. Low interest rate financing often accompany these lower prices, compounding the discount and Toyota’s margin pain.
Toyota can recover from this loss of Reliability. However, its recovery is likely to take several years. In the meantime, its competition can and will improve their Reliability performance. Toyota may be a while regaining its former pricing premium.
In many markets, leadership in Reliability is the hallmark of the best competitors in the industry. That has been true until lately with Toyota in the automobile industry. Their once vaunted reputation for quality and durability, in other words Reliability, enabled them to command a premium of $1M to $2M on cars priced in the $20M to $25M range. This pricing advantage came about because customers would pay more for better Reliability. (See the Perspective, “Reliability: The Hard Road to Sustainable Advantage” on StrategyStreet.com.)
This is a somewhat incorrect description of how the market actually works. Toyota did not intentionally price its products higher than those of its competitors. Rather, it set its prices and then its competitors determined that they had to offer discounts of $1M to $2M in order to entice sufficient numbers of customers to purchase their products over those of Toyota. This competitive price discount pulled some customer attention away from Toyota’s Reliability, where the competitors were at a disadvantage, to price, where they had an advantage. (See “Audio Tip #68: Producing a Net Value Improvement for Customers” on StrategyStreet.com.) Of course, Toyota’s higher price enabled that company to make good profits while many competitors, most notably the domestic automobile producers, were racking up large losses in the industry.
Toyota’s advantage in price is slipping away quickly. Some analysts have estimated that prices for the Toyota cars on recall have fallen from $500 to $1500. Low interest rate financing often accompany these lower prices, compounding the discount and Toyota’s margin pain.
Toyota can recover from this loss of Reliability. However, its recovery is likely to take several years. In the meantime, its competition can and will improve their Reliability performance. Toyota may be a while regaining its former pricing premium.
Monday, February 22, 2010
To Bundle or Not to Bundle, That is the Question
For years, the cable industry has bundled its channels into tiers. They create “buy-throughs” which require a customer to purchase more than one tier to get to a particular channel the customer may want. For example, if the customer would like to have a channel in the second tier, the customer must also purchase the first tier along with the second tier bundle, of course, at a higher price.
Customers generally dislike this mode of pricing because they get many channels that they do not watch. The Wall Street Journal reports that Nielsen estimates that households watch an average of 18 channels out of the 130 they receive. So customers are paying for a lot of channels that are of little or no use to them.
This cable pricing approach to bundling is unusual. In the vast majority of cases, bundling is a tactic a company might use to reduce the impact of a falling price environment. With bundling, a company may sell more product, though at a lower price per unit of sale. The greater amount of product sold in the individual transaction, however, helps to preserve the company’s margins, even as prices fall.
There are two major types of bundling. The first type bundles several units of the same product into a package. For example, the airline Cape Air ran a program selling ticket books of ten one-way flights at discounted prices on its flights around Cape Cod and a few other destinations.
In the other type of bundling, a company would create a package of related products. As the recession hit the restaurant industry, Starbucks began offering breakfast deals in which a consumer could get a combination of an oatmeal and a latte or of a breakfast sandwich and a coffee for $3.95.
The cable industry has used the bundles to make the consumer feel like he is not paying a great deal for any one cable channel. The cable companies themselves are largely monopolies in their local areas. They have the freedom to raise their prices faster than inflation, and have done so for a number of years, using this bundled product approach.
Will this approach last for the long term future? That’s hard to say. (See “Video #3: Predicting the Direction of Margins" on StrategyStreet.com.) Certainly prices have gotten very high today. The cable companies have raised the price umbrella over new competition. Consumers would like to find lower prices and media producers are always looking for new channels of distribution. Increasingly, the internet is becoming an answer for both of these players. New services are arising that allow consumers to pick and choose individual programs to watch on the internet, or even on an internet equipped television. (See the Symptom and Implication, “Large competitors are maintaining price levels as smaller competitors discount” on StrategyStreet.com.) That is a real threat to the cable company’s bundled pricing stance.
Customers generally dislike this mode of pricing because they get many channels that they do not watch. The Wall Street Journal reports that Nielsen estimates that households watch an average of 18 channels out of the 130 they receive. So customers are paying for a lot of channels that are of little or no use to them.
This cable pricing approach to bundling is unusual. In the vast majority of cases, bundling is a tactic a company might use to reduce the impact of a falling price environment. With bundling, a company may sell more product, though at a lower price per unit of sale. The greater amount of product sold in the individual transaction, however, helps to preserve the company’s margins, even as prices fall.
There are two major types of bundling. The first type bundles several units of the same product into a package. For example, the airline Cape Air ran a program selling ticket books of ten one-way flights at discounted prices on its flights around Cape Cod and a few other destinations.
In the other type of bundling, a company would create a package of related products. As the recession hit the restaurant industry, Starbucks began offering breakfast deals in which a consumer could get a combination of an oatmeal and a latte or of a breakfast sandwich and a coffee for $3.95.
The cable industry has used the bundles to make the consumer feel like he is not paying a great deal for any one cable channel. The cable companies themselves are largely monopolies in their local areas. They have the freedom to raise their prices faster than inflation, and have done so for a number of years, using this bundled product approach.
Will this approach last for the long term future? That’s hard to say. (See “Video #3: Predicting the Direction of Margins" on StrategyStreet.com.) Certainly prices have gotten very high today. The cable companies have raised the price umbrella over new competition. Consumers would like to find lower prices and media producers are always looking for new channels of distribution. Increasingly, the internet is becoming an answer for both of these players. New services are arising that allow consumers to pick and choose individual programs to watch on the internet, or even on an internet equipped television. (See the Symptom and Implication, “Large competitors are maintaining price levels as smaller competitors discount” on StrategyStreet.com.) That is a real threat to the cable company’s bundled pricing stance.
Thursday, February 18, 2010
Impressive Results from a Change in Pricing Strategy
About a year ago, we wrote a blog about the leading ski resort in Northern California, Squaw Valley, emerging from a Leader’s Trap (see Blog here). We predicted at the time that Squaw Valley would gain market share quickly as a result of its change in pricing strategy. The preliminary results from this change in strategy are in. They are impressive.
First, some background. For several years, a large well-run ski resort, Northstar, offered very attractively priced season passes. The other ski resorts largely ignored Northstar’s pricng, so that ski resort gained market share with its low-priced season passes. (See “Audio Tip #141: The Power of Price in Non-Hostile and Hostile Markets” on StrategyStreet.com.) Last year, Squaw Valley, the largest and most varied ski resort in North Lake Tahoe, reduced its season pass prices drastically from something like $1449 to either $369 or $469, depending on black-out dates. (See “Audio Tip #102: When is Price Likely to go Down?” on StrategyStreet.com.) This change in pricing reduced Northstar’s season pass price advantage over Squaw Valley’s season pass from 75% to about 11%. (See “Audio Tip #107: Peers and Their Pricing”.)
With something less than half the season completed, virtually all the resorts in North Lake Tahoe have seen an increase in skier visits. The economy has recovered somewhat and the snow has fallen in abundance for the first time in the last four years. Here are the changes in individual resort skier visits for a few of the larger resorts in North Lake Tahoe:
* Northstar +10%
* Alpine Meadows/Homewood +20%
* Sugar Bowl +21%
* Squaw Valley +46%
By any measure, Squaw Valley’s change in pricing has brought it a massive increase in market share. Of course, the growth in revenue is considerably below the growth in skier visits due to price discounting. However, each of those additional skiers also is likely to be a customer for (undiscounted) food, beverages, equipment and other purchases at the resort.
My guess is that the Squaw Valley resort joins the rest of the local businesses in North Lake Tahoe in being delighted at the results of Squaw Valley’s change in pricing strategy.
First, some background. For several years, a large well-run ski resort, Northstar, offered very attractively priced season passes. The other ski resorts largely ignored Northstar’s pricng, so that ski resort gained market share with its low-priced season passes. (See “Audio Tip #141: The Power of Price in Non-Hostile and Hostile Markets” on StrategyStreet.com.) Last year, Squaw Valley, the largest and most varied ski resort in North Lake Tahoe, reduced its season pass prices drastically from something like $1449 to either $369 or $469, depending on black-out dates. (See “Audio Tip #102: When is Price Likely to go Down?” on StrategyStreet.com.) This change in pricing reduced Northstar’s season pass price advantage over Squaw Valley’s season pass from 75% to about 11%. (See “Audio Tip #107: Peers and Their Pricing”.)
With something less than half the season completed, virtually all the resorts in North Lake Tahoe have seen an increase in skier visits. The economy has recovered somewhat and the snow has fallen in abundance for the first time in the last four years. Here are the changes in individual resort skier visits for a few of the larger resorts in North Lake Tahoe:
* Northstar +10%
* Alpine Meadows/Homewood +20%
* Sugar Bowl +21%
* Squaw Valley +46%
By any measure, Squaw Valley’s change in pricing has brought it a massive increase in market share. Of course, the growth in revenue is considerably below the growth in skier visits due to price discounting. However, each of those additional skiers also is likely to be a customer for (undiscounted) food, beverages, equipment and other purchases at the resort.
My guess is that the Squaw Valley resort joins the rest of the local businesses in North Lake Tahoe in being delighted at the results of Squaw Valley’s change in pricing strategy.
Thursday, February 11, 2010
Retailers as the Source of Creativity
It seems that retailers are often on the leading edge when it comes to innovation and creativity in their crafting offerings. They have an excellent sense of how their customers think.
For example, a couple of years ago, McDonald’s instituted a product offering around the change that a customer was about to receive for his order. Software the company had purchased created a discount offering that allowed the customer to take another item for the change, or slightly less than the change, he was about to receive from his original order. A high proportion of customers accepted these offers. (See “Audio Tip #53: Setting Specific Company Objectives for Many Customers” on StrategyStreet.com) While the additional product was offered at a discount, it still increased the margin on the sale.
Family Dollar stores offer another example. This company has done very well over the last 18 months, despite the recession. In fact, consumers naturally turned to Family Dollar and other very low-priced stores during these difficult times when their budgets are pressured. Family Dollar is not resting on its laurels. In fact, it is adjusting its offerings to fit its current customer needs. Their principal hope today is to retain the new customers it has attracted over the last 18 months. The company has found that customers are focusing on their needs, rather than their wants. So Family Dollar has added more food items and reduced offerings of appliances and other home categories. The company is also trying to increase its share of its customers’ purchases. It hopes to increase the total purchases on each customer’s visit and to shift some of those additional purchases to higher margin items. (See “Audio Tip #60: Customer Segmentation by Needs” on StrategyStreet.com.)
It offers the following example of its marketing changes to increase sales: If the company advertises underwear and laundry detergent in its regular flyer, both items may increase proportionately in sales. However, the laundry detergent often brings with it additional purchases that would be used with the detergent, such as fabric softeners, bleach and paper towels. These latter additional items carry higher margins because they are not included in the regular flyer discount offerings. The company has found that sales containing laundry detergent advertised in the flyer were 14 times more likely to include fabric softener, which wasn’t advertised, than the average transaction.
Retailing has become a data-hungry industry, and the retailers have grown in their understanding of customer needs by mining that data to develop creative merchandizing innovations that help both their customers and their bottom lines.
For example, a couple of years ago, McDonald’s instituted a product offering around the change that a customer was about to receive for his order. Software the company had purchased created a discount offering that allowed the customer to take another item for the change, or slightly less than the change, he was about to receive from his original order. A high proportion of customers accepted these offers. (See “Audio Tip #53: Setting Specific Company Objectives for Many Customers” on StrategyStreet.com) While the additional product was offered at a discount, it still increased the margin on the sale.
Family Dollar stores offer another example. This company has done very well over the last 18 months, despite the recession. In fact, consumers naturally turned to Family Dollar and other very low-priced stores during these difficult times when their budgets are pressured. Family Dollar is not resting on its laurels. In fact, it is adjusting its offerings to fit its current customer needs. Their principal hope today is to retain the new customers it has attracted over the last 18 months. The company has found that customers are focusing on their needs, rather than their wants. So Family Dollar has added more food items and reduced offerings of appliances and other home categories. The company is also trying to increase its share of its customers’ purchases. It hopes to increase the total purchases on each customer’s visit and to shift some of those additional purchases to higher margin items. (See “Audio Tip #60: Customer Segmentation by Needs” on StrategyStreet.com.)
It offers the following example of its marketing changes to increase sales: If the company advertises underwear and laundry detergent in its regular flyer, both items may increase proportionately in sales. However, the laundry detergent often brings with it additional purchases that would be used with the detergent, such as fabric softeners, bleach and paper towels. These latter additional items carry higher margins because they are not included in the regular flyer discount offerings. The company has found that sales containing laundry detergent advertised in the flyer were 14 times more likely to include fabric softener, which wasn’t advertised, than the average transaction.
Retailing has become a data-hungry industry, and the retailers have grown in their understanding of customer needs by mining that data to develop creative merchandizing innovations that help both their customers and their bottom lines.
Monday, February 8, 2010
Look Out Below
The small consumer battery business is in the midst of a price war. The short-term losers in this war will be the industry leaders. But the longer term losers would be the low-end Price Leader competitors in the market.
Energizer Holdings is the industry leader’s market share, with a 39% share. Procter and Gamble follows closely with its 36% share of the market with its Duracell line. Low-end private label suppliers make up most of the remaining market. (See the Symptom and Implication, “Most competitors are offering low prices after a period where leaders held prices high” on StrategyStreet.com.)
The price wars have been a feature of this industry over the last couple of years. In the latest move, Procter and Gamble has offered a discount-in-kind for its packages of batteries. The former 20-pack package will go to 24 batteries. The 16-pack will go to 20 and the 8-pack will go to 10. All of these changes in batteries-per-pack will come without an increase in price for the package. So, the price per battery in these packages will fall 20% to 25%. Analysts estimate that this will translate to an 8% to 10% reduction in average price for the entire Duracell line. This is, indeed, a significant price reduction.
Energizer has no choice but to follow this Duracell price reduction. Consumers have shown little loyalty to either brand when there is a price difference involved in the purchase decision. Energizer will either follow or lose share quickly. It will follow.
Any time an industry leader loses 10% of its revenues, without reducing its cost by an equivalent amount, the pain on the bottom line is extreme. The average business unit makes a pretax return on sales of about 9% (See StrategyStreet/Tools/Benchmarks). The batteries are more profitable than average, but losing 10 percentage points off your previous margin structure will hurt anyone. So, both industry leaders, Duracell and Energizer, will suffer in the short term.
You might ask yourself, why would two companies who, between them, own 75% of the market engage in a price war with one another? In normal situations, they would never do this. But, battery prices have been high for a while. The industry leaders have held a price umbrella over cheap, private label, brands who have gained share over the recent years. This price war is really aimed at the Price Leaders. They will be the long-term losers in this war.
The private label brands do not have the margin structure that will allow them to take equivalent price reductions in order to keep a significant price advantage over Duracell and Energizer batteries. This price war will cripple them and reduce their ability to maintain the quality of their products and services.
Buy your consumer batteries now. Within a couple of years, the cheap private label brands will have suffered and fallen on hard times. Then, they will gladly follow the inevitable future price increase that the industry leaders will institute to make up for the margin losses of today.
This periodic price war to knock back private label competitors is a common pattern in consumer products. You will see it frequently with well-known consumer brands in cereals, soups, cigarettes, detergents and other products. In these markets, high prices support high marketing costs and high margins, and allow private label suppliers to grow market share for a period of time. Eventually, the branded companies reduce prices, sometimes drastically, to remove the private labels’ price advantages and drain them of market share (see the Symptom and Implication, “As large competitors match low prices, other competitors face difficulties” on StrategyStreet.com).
Energizer Holdings is the industry leader’s market share, with a 39% share. Procter and Gamble follows closely with its 36% share of the market with its Duracell line. Low-end private label suppliers make up most of the remaining market. (See the Symptom and Implication, “Most competitors are offering low prices after a period where leaders held prices high” on StrategyStreet.com.)
The price wars have been a feature of this industry over the last couple of years. In the latest move, Procter and Gamble has offered a discount-in-kind for its packages of batteries. The former 20-pack package will go to 24 batteries. The 16-pack will go to 20 and the 8-pack will go to 10. All of these changes in batteries-per-pack will come without an increase in price for the package. So, the price per battery in these packages will fall 20% to 25%. Analysts estimate that this will translate to an 8% to 10% reduction in average price for the entire Duracell line. This is, indeed, a significant price reduction.
Energizer has no choice but to follow this Duracell price reduction. Consumers have shown little loyalty to either brand when there is a price difference involved in the purchase decision. Energizer will either follow or lose share quickly. It will follow.
Any time an industry leader loses 10% of its revenues, without reducing its cost by an equivalent amount, the pain on the bottom line is extreme. The average business unit makes a pretax return on sales of about 9% (See StrategyStreet/Tools/Benchmarks). The batteries are more profitable than average, but losing 10 percentage points off your previous margin structure will hurt anyone. So, both industry leaders, Duracell and Energizer, will suffer in the short term.
You might ask yourself, why would two companies who, between them, own 75% of the market engage in a price war with one another? In normal situations, they would never do this. But, battery prices have been high for a while. The industry leaders have held a price umbrella over cheap, private label, brands who have gained share over the recent years. This price war is really aimed at the Price Leaders. They will be the long-term losers in this war.
The private label brands do not have the margin structure that will allow them to take equivalent price reductions in order to keep a significant price advantage over Duracell and Energizer batteries. This price war will cripple them and reduce their ability to maintain the quality of their products and services.
Buy your consumer batteries now. Within a couple of years, the cheap private label brands will have suffered and fallen on hard times. Then, they will gladly follow the inevitable future price increase that the industry leaders will institute to make up for the margin losses of today.
This periodic price war to knock back private label competitors is a common pattern in consumer products. You will see it frequently with well-known consumer brands in cereals, soups, cigarettes, detergents and other products. In these markets, high prices support high marketing costs and high margins, and allow private label suppliers to grow market share for a period of time. Eventually, the branded companies reduce prices, sometimes drastically, to remove the private labels’ price advantages and drain them of market share (see the Symptom and Implication, “As large competitors match low prices, other competitors face difficulties” on StrategyStreet.com).
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