A friend, also named Scott, recently sent me an article Leading the Way that discussed the frequency of small lubricant competitors leading the way in price changes. The article, originally published in Lubes’n’Greases magazine demonstrated that independent producers increased prices of lubricants as frequently or more than the major producers. The article reminded me you don’t have to be the largest competitor to be a price leader.
Leadership in pricing includes the obvious decision of when to increase or decrease prices, but it also includes the structure of your market price model, the architecture of price differentiation between segments and customers, and your process of innovation in pricing.
Starbucks started as a single location offering premium dark-roasted coffee and premium service at premium prices. There were other places at which customers could buy coffee at much lower prices, but Starbucks demonstrated customers would pay more for a compelling value proposition. Uber is another example. When they started, they were much smaller than yellow taxi companies, and they offered prices that were often lower than taxis. However, Uber was the first to use surge pricing which raised their prices above taxis during peak periods. Customers were willing to pay because surge pricing greatly increased the odds they would get a ride during those periods. In this case, Uber led the way in both price levels and price structure.
When I think of innovation in pricing, I often think of airlines. Although startup airlines initially were simply low-price competitors, in recent years they have offered price leadership in the way of ala carte pricing. Airlines like Spirit began using a pricing structure that could offer something to the most price-sensitive customers without killing all their prices. So there is a very low price available for the customer who only wants a seat, does not need to check a bag or store one overhead, does not mind a middle seat, does not mind boarding last, and does not want anything to drink. And by not providing those things, Spirit keeps their cost structure low. For customers who want some of those other things, the prices are higher, and offer a financial return to Spirit for providing them. These unbundled price structures are now very common in air travel.
One final example of price leadership comes from T-Mobile, the 4th largest wireless phone carrier. As a smaller carrier whose network may not be quite as robust as Verizon and ATT, T-Mobile initially just offered lower prices. Recently, however, T-Mobile changed their offering to include unlimited data, an all-you-can-eat plan. This new plan targeted segments of data-hungry customers and those who were afraid they might use too much data and receive huge bills. They have been very successful in taking customers from the largest competitors, and now all carriers have an unlimited data option. This may turn out to be a short-lived victory if all the carriers find their capacity used up by data hogs; but the point is a smaller competitor was able to lead the market with a new price structure.
These examples show you do not have to be the largest player in the market to be a price leader, but there are some conditions that must be in place. First, you must have a unique value proposition that you can articulate to potential customers. When you can tell customers, “Here is how we are different and here is how we add value to you”, you can offer a price or price structure that aligns with that value. If you can’t articulate that difference, there is no reason for customers to follow you with higher or different prices. When you can describe your value to customers, align your prices with that value.
The second condition is your customers must be happy with your service. If your customers are angry, small changes can cause them to look elsewhere. Airlines may be the exception to this rule. Last year, Spirit was ranked 10th in customer satisfaction, but is still growing. In this case, customers continue to demonstrate they care more about flight schedules, and a cost-effective way to get the right package of services and amenities. If Spirit can improve their service, they will grow even faster.
The third condition is don’t get greedy. Even if you have an excellent value proposition and outstanding service, there is a point at which customers will still rebel. During the past 2 years, we have seen multiple examples of pharmaceutical companies jacking up their prices too quickly. Customers have been outraged and have actively looked for alternatives.
My last point is it is important to monitor your customer results and competitor reactions when you make a change. Competitors often follow when a market player makes a move and experiences some customer success, but not always. If your results from a price change are poor, reverse the change and regroup. You will still have learned valuable lessons in your attempt.
There is money to be made by leading the market or a segment of the market, but you won’t get there if you don’t try.
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