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How to Compete on Pice, the Role of Sales and Distribution Channels and a Big Apology
Friday, August 2nd, 2019
I've been super busy over the last few weeks working on some changes to our website, hiring a few more people, revamping our sales efforts and improving the way we present information.

Some of these changes will improve your experience as a subscriber to this newsletter that I hope you'll like.

That being said, I won't be covering any market news this week since I didn't have the time to get to it but instead, I'm sharing with you two interesting sections of the book talking about price competition and sales and distribution channels that I'm sure you'll enjoy.

I apologize for the inconvenience, but I promise that the improvements we're making are well worth the effort. If it's any consolation, I haven't shaved in about three weeks.

I hope you enjoy this week's newsletter. Sun.
How to Effectively Compete on Price
Despite what many might think, competing on low prices doesn’t mean selling a crappy product but quite the opposite. An effective low-price strategy must always start with a good product.

While the success of low-price positioning hinges on rigorous cost discipline, low prices should not be the result of watering down good products, but from focusing on the most basic needs of price-sensitive buyers.

A low-price provider avoids extra features and frills that are only valuable to higher-end buyers, and instead delivers a basic solution that does a job that is just good enough.

Procter & Gamble’s Ivory soap bar, Ikea’s furniture, and JetBlue in the airline industry are all examples of low-price players.

Their success is not in making comprehensive products cheap but in carrying a basic, stripped-down offer, doubling down on the features that price-sensitive buyers need, and delivering that value proposition cheaper than anybody else.

A second misconception about cost-based competition is that low prices mean lower margins.

That’s absolutely not true, and as we mentioned before, low-cost players like Walmart outperformed high-end players by making money through a different business model, in that case faster inventory turnover (selling the same items more times than competitors within the same period).

Successful low-price competitors target customers who are willing to pay less to get a more basic offer and operate super-efficient value chains that minimize all costs.

Aldi, a supermarket chain with more than 10,000 stores around the world, runs a very efficient supply chain that allows it to achieve extraordinary cost advantages.

To start, it carries a very narrow product selection which helps it negotiate better prices with vendors and minimize logistics costs while increasing turnover on those items. It builds stores in inexpensive locations, products are displayed on pallets and customers have to bring their own bags.

Despite these seeming inconveniences and its low average markup of 13 percent (compared to 25-30 percent for other retailers), Aldi outperforms its rivals year after year on a return on investment basis.

Its success is due in part to a low-cost operation that de-emphasizes factors that don’t add value for price-sensitive buyers and focuses instead on improving factors that are important for those buyers, like having fast and efficient checkout.

When running a low-cost operation, every penny counts, from the cost of manufacturing, packaging, distribution and advertising, to how employees are incentivized and how the company carefully invests in R&D and customer acquisition.

In the case of Ivory, for example, the air bubbles that helped the soap float also helped reduce costs because it needed less materials, which in addition to basic wrapping, lack of deodorant and fancy scent ingredients and low promotion, helped the brand achieve cost advantages over other soap bars.

For low-price competitors, frugality becomes their way of life and something of a religion, and it must be well-rewarded by management. This penny-pinching mentality, which translates into highly efficient business models, permeates everything a company does and is the most valuable asset of low-price competitors.

Their success relies on continually challenging cost assumptions, sometimes defining their own metrics of quality and performance, just like JetBlue has done in the budget airline space.

In addition to cost efficiency, "speed to market" is the next most powerful tool of low-price competitors.

To create new sources of growth, these low-price incumbents must continually bring their low-cost business model upmarket, integrating features and offers only available in higher-end solutions as a way to temporarily increase their margins.

For example, McDonald’s has added Angus beef burgers and grilled chicken sandwiches to its menu, Walmart and Costco began selling tires and offering car repair services, and Pepsi and Coke have added higher-margin drinks like Gatorade and Powerade to their portfolios.

These are all cases of low-price players bringing their low-cost business models to capture value from higher-end offers.

"Your margin is my opportunity," is how Amazon’s Jeff Bezos best describes this strategy, as his company brings its low-cost business model upmarket in all directions to chase higher-margin opportunities, sending waves of fear through every market it enters.

The speed at which low-price competitors embed higher-end solutions into their low-cost business models is what makes it so hard for high-end providers to compete with them.

The Role of Sales and Distribution Channels
The success of your product strategy relies in part on how good your company gets at putting the right offer in front of the right customers, because one thing defines the other: the customers you target define the products you need to create, in the same way that the products you create define the customers you should target with them. That is the two-way street.

With that being said, there’s no such a thing as "a great product" unless you specify who the target customer is. A modern arc-flash industrial oven may be a great novelty, but useless for a plastic surgeon.

Putting the right product in front of the right customers implies that sales and distribution channels are a critical component to make your strategy work. In the end, you may have people willing to buy your products, but if the product is inaccessible to them, they can’t be considered as demand.

A great customer segment that you can’t reach is as bad as reaching the wrong customer with the right product.

Promotion efforts, on the other hand, may also play an important role, pre-selling the benefits of your offer to your target consumers, since for sales to happen buyers must first believe that the solution can deliver its promise.

Advertising, mass and direct marketing, product information, public relations and other forms of promotion are used to affect the perception of the product in the target customers’ minds in a way that maximizes its sales.

A company can have the greatest salespeople in its workforce, but if the messaging about the solution is out-of-synch with the expectations of target customers, sales efforts will be wasted.

The role of the promotion effort is to disseminate relevant information that helps differentiate products and services in the eyes of target consumers.

Sales and distribution channels, along with promotional efforts, expand the scope of your product’s value proposition and convert mere target buyers into demand. Together, they help position the solution in a competitive market.

This is where serious market research really pays off, and why defining a customer value proposition simply as an "statement of value" falls short of its true power in demand creation. To quote marketing guru Peter Drucker:

"The aim of marketing is to make selling superfluous. The aim of marketing is to know and understand the customer so well that the product or service fits him and sells itself".

 
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