This Leader's Trap Comes to a Quick End

In February of 2009, we wrote a blog about Abercrombie and Fitch in a Leader’s Trap (see the blog, “A High End Retailer in a Leader’s Trap”). In that blog, we observed that Abercrombie and Fitch refused to discount its products in the marketplace, despite the fact that American Eagle Outfitters and Aeropostale, two of its main competitors, were offering lower prices. We noted that Abercrombie’s market share was falling, while Aeropostale’s was clearly on the rise. We predicted that Abercrombie would have to come out of its Leader’s Trap soon by changing its pricing policy.

Abercrombie has surrendered.

The company reported a larger than expected first quarter loss and said that it planned to lower prices to boost sales. It admitted that this price reduction is a 180 degree change from its previous strategy of keeping prices high through the recession (see the Perspective, “Who has Pricing Power?” on StrategyStreet.com).

Earlier in the year, Abercrombie had argued that price-cutting would increase sales but would destroy its high-end image and the company’s future pricing power (see Video #4: The Risk of Slow Demand Growth on StrategyStreet.com). Competitors saw otherwise. They took advantage of Abercrombie’s high prices. The predictable result is that shoppers deserted the teen retailer for other retailers offering lower prices. Abercrombie then faced an inventory pile-up and a fall-off in sales.

Once customers begin deserting a company because of its high prices, the company’s Leader’s Trap will always come to an end (see Video #42: Leader’s Trap on StrategyStreet.com). When it does end, the company will have lost market share and margin. Some of the market share loss is likely to be long lasting.

Punch and Counterpunch in the Online Travel Industry

Orbitz Worldwide, the online travel booking agency, competes with the likes of Travelosity and Expedia. Of the three, Orbitz is the most dependent on airline booking fee revenue for its profits. Travelocity and Expedia both reduced fees for their booking of airline tickets before Orbitz. Orbitz held on to protect its margins. Orbitz began losing market share and reversed course. It announced that it would waive booking fees on most flights booked through May. This brings its pricing in line with its competition.

Then Orbitz did the industry one better. In an effort to grab market share and punish its discounting competition, the company announced a new promotion called “Dare to Compare.” This program brings with it a reduction in service fees on hotel rooms booked on its web site through July 15th. Orbitz is hoping to gain enough market share to offset the reduction in its fees.

Normally, an industry with only three major players is able to protect its pricing structure. Usually, the three players decide there is little to gain in price competition with one another. Apparently, this industry thinks differently. Orbitz most recent reporting found revenue off by 14%, as travelers cut back in the tough economy.

These industry discounts are a waste of margin. The entire industry is likely to copy any leading competitor’s price discounts. After all, the industry lives with the airline industry, where minute-by-minute price matching has become a non-clad rule. These discounts don’t mean much to consumers so they are unlikely to energize demand.

Orbitz also took another step recently that is far more promising. It launched a price-assurance program that automatically refunds customers when a hotel rate below the rate they paid appears on its web site and is purchased by another customer. This innovation improves the company’s Reliability in customer eyes (see the Perspective, “Discovering Hidden Pricing Power” on StrategyStreet.com).

For many ideas to improve market share and profits by a judicious use of pricing, see http://www.strategystreet.com/improve/pricing__1/brainstorming_ideas.