Confronting Low-End Competition

A low-end competitor is like a shark. It can appear unexpectedly from below, churning the waters by offering big savings to customers, taking a bite out of comfortable profits and disrupting established ways of doing business. And it can leave a wake of destruction: devastated industry leaders, flattened profits and disgruntled customers.

No company is immune to such an attack, and most managers will face at least one — and possibly many — during their careers. If there is a defense, it lies in knowledge: knowing what form the attack is likely to take and under what conditions. More importantly, managers should be aware of their different options, including the response that is most likely to restore market calm in the least disruptive way.

The Dynamics of a Low-End Attack

Every industry has one or more standard leaders: large competitors that set the benchmarks for performance and price. General Motors fills this role in the automotive industry, Hewlett-Packard in personal computers and Kellogg in breakfast cereals. Typically, a standard leader sells a mix of products that roughly mirrors that of the overall industry, and its price points are followed by other companies to within a narrow range. Together, the standard leaders of a market control a large chunk of the action: usually from 35% to 80% of total industry sales.

It is these standard leaders — or, more precisely, their sales volume — that the low-end competitor targets, often by offering discounts that are more than 20% lower than prevailing price points. In mainframe memory storage, EMC Corp. established itself through price cuts of 25%. The successful PC clones of the late 1980s underpriced IBM Corp. by at least 30%. Cott sells private-label colas and other soft drinks for prices at least 25% below Coca-Cola and Pepsi. When the price discounts are less than 20%, low-end competitors usually have to provide other benefits, either in the acquisition of or use of the product or service. In the mid-1980s, for example, Calgary-based Minit Lube Ltd. offered oil changes at a price only slightly below that of service stations, but the service was completed in just 10 minutes, saving customers the inconvenience of dropping off and picking up their cars.

Of course, a low-end competitor almost always has to reduce some customer benefits in order to lower costs (and thereby enable the company to make a profit).