Are Price Leaders In An Industry Really Leaders?

Live By Price. Die By Price.

While many think business is about making money, it is merely a biproduct of a business’ ultimate charge, which is to solve a problem (aka, fulfill an unmet need). Revenue is the result of effectively identifying a need, aligning that need to purpose, and managing all aspects of the business to successfully achieve strategic objectives. One of which is profitability so that the business can continue to achieve its intended purpose.

In a highly competitive industry, many seek to use price and cost as the primary driver of growth. Businesses slash prices so that they can gain market share. While this approach can lead to short-term growth, sustained growth over the long-term requires something more. Something more substantial and meaningful to the customer. It requires the effective reduction of costs coupled with an increase in value beyond price. Price should be viewed as a lure. The value a company matches to its price is the hook.

It is important to note that price does not mean a business needs to be the lowest in the industry. If price were the only thing that mattered Target would not be holding its position in the discount big box retailer industry. Price is more about alignment to value. If the value received meets a need and expectation, the market will allow for a price that aligns to the perceived value. People are willing to pay more for better service, a better experience, higher quality, etc.

Becoming the cost and price leader in an industry requires so much more than simply slashing prices. It requires innovation. Those businesses that fail to find meaningful ways to reduce costs to support price reductions will merely eat away at themselves from the inside (i.e., Sears and K-Mart). A business must innovate so that margins can be maintained if they hope to withstand the test of time.

Take Walmart for example. Early on Walmart was driven “to save people money so they can live better”. Walmart effectively sought to raise the standard of living for everyone, no matter who they were or how they shopped. However, they forgot that the very people who worked for them and supplied their goods deserved the same, to live better. They coupled low cost with several factors, some of which caused them problems (i.e., allegations of racial and gender discrimination, foreign product sourcing, anti-competitive practices, treatment of product suppliers, environmental practices, employee pay, etc.).

However, this is the point. A business cannot reduce cost without innovation. If anyone thinks they can sustain behaviors that oppress and bully the support system so they can maintain reduced prices through lower costs, while maintaining margins at the same time, they are likely not in touch with reality. Nor are they a student of business, leadership, and history. This practice does not work long-term and will lead to a company’s demise. Business, like life, is about balance. Balance is about fair prices and good value for the customer, fair wages and good work environment for the employee, fair prices and loyalty for the supplier, and innovation. Innovation that results in efficiencies that drive down costs and support the maintenance of margins.

While increased demand can ease the pressure of price reduction in the short-term, if efficiency innovations are not implemented, support costs will continue to increase over the long-term and squeeze margins. In Walmart’s case, they corrected past behaviors and have since worked at becoming a better employer while seeking innovation to become more cost effective. Efficiencies in packaging, logistics, online experience, in-store check-out, in-store shopping experience, and more have helped Walmart to increase volume while also reducing cost without having to lean on practices that caused them much angst in the past. As such, Walmart has upgraded its image and operating practices, while improving its business model at the same time.

Another approach to gaining market share was brought to light in W. Chan Kim and Renee Maugborgne’s excellent Harvard Business Review article from 2004 and subsequent book of the same name from 2015, “Blue Ocean Strategy”. Here, Kim and Maughborgne outline how innovation can also be used to create a new market. Sometimes we can achieve market share growth through innovations to reduce costs. Other times it can be achieved by going back to the reason we started the business in the first place, meeting an unmet need.

In one example, Kim and Maughborgne share how Cirque du Soleil created a new and uncontested market space by combining the best a circus had to offer with the best theater, dance, and television had to offer. As such, they created a market for a product that was similar but different to many others. This is an example of true differentiation. Was Cirque a totally Earth-shattering innovation? No. Was it innovative enough and market aware? Yes!

If you think that your practice or business is too small to make a difference or implement changes such as these, think again. As Christine Todd Whitman so eloquently stated, “Anyone who thinks that they are too small to make a difference has never tried to fall asleep with a mosquito in the room”. True innovation and change begin with a thought that is then placed into practice. When we look back at Cirque’s business model it seems like such a logical and almost natural progression. However, 30 years ago it probably felt like a major risk.

Randy Stepp is a principal with Renaissance Leadership Group. RLG is a full-service business development company driven by Purpose, Passion, and Strategy and the goal of helping entrepreneurs realize their vision for their business.

Visit Renaissance Leadership Group at www.renaissanceleadershipgroup.com to learn more.