Harvard Business Review by calibre

Author:calibre
Language: eng
Format: mobi
Publisher: calibre
Published: 2013-04-04T17:56:53.494719+00:00

A useful explanatory frame began to emerge only after we shifted our emphasis away from what these companies did to how they thought.

We don’t mean to suggest that a company can afford to ignore its relative price position, any more than one that competes through low prices can afford to ignore product or service quality. We mean only that in most cases, outstanding performance is caused by greater value and not by lower price. Companies seeking sustained, exceptional profitability should pursue strategies that are consistent with this rule and avoid those that aren’t.

Bear in mind the before in “better before cheaper.” When the competitive landscape changes, as it did for Maytag, you can lower your prices and still adhere to the rule. What matters is not whether your prices are lower than they used to be but that they remain higher than your rivals’. Maytag could have diversified into only those segments where it could establish a superior nonprice position, even if the segments demanded lower price points than those the company had historically offered.

For all its virtues, a nonprice position isn’t without danger. Typically, a company that competes on dimensions other than price must constantly battle rivals that have figured out its formula. At the very least, me-too competitors may confuse customers and blur an incumbent’s hard-won differentiation. At worst, they may find even better formulas for success. (See the sidebar “The Perils and Promise of a Nonprice Position.”)

The Perils and Promise of a Nonprice Position

Don’t forget to keep an eye out for disruptive threats. Charging higher prices in pursuit of higher gross margins is what creates opportunities in less-demanding market segments and provides oxygen for would-be disruptors with cheaper, good-enough products. But disruption is now well enough understood that it’s possible to determine pretty accurately when alternative solutions have disruptive potential and warrant rearguard counterattacks. And a word to would-be disruptors: The most effective and profitable among you follow the rules when launching disruptive attacks.

2. Revenue Before Cost

Companies must not only create value but also capture it in the form of profits. By an overwhelming margin, exceptional companies garner superior profits by achieving higher revenue than their rivals, through either higher prices or greater volume. Very rarely is cost leadership a driver of superior profitability.

There’s nothing startling about the notion that higher prices can lead to higher profits, but we were impressed by the range of contexts in which companies have built businesses on this idea. Take, for example, the U.S. discounter Family Dollar Stores, a Miracle Worker, which has bested the legends in discount retailing since the mid-1970s. Considering that many of the company’s customers are poor, it’s perhaps surprising that Family Dollar’s success has resulted from higher prices, which it can charge because it offers superior convenience and selection. Its smaller stores are in locations that are easier for customers to get to, and many shoppers buy small amounts of a wide variety of goods. Running these stores is unavoidably costly—in fact, the company tolerates higher costs and lower efficiency than would many of its larger competitors.

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