Competition as an external influence: a rival's move forces a response
Definition
Competition: rivalry between businesses selling similar products to the same group of customers.
Competitive advantage: the reason a customer chooses one business over the rivals available to them.
- Competition is an external influence, so a rival can cut its price, open a shop two streets away or launch a better product whether you want it to or not.
- A rival's move reaches your profit along a chain, because customers start switching, so you change your price, hours, product or service to hold on to them.
- Every response costs money, in wages, printing or revenue given away on each sale, so competition decides what you can afford as well as what you sell.
Example
- Aldi and Lidl compete on price and carry a narrower product range.
- Tesco and Sainsbury's answered with a much wider range and click and collect rather than by copying the discounters.
- A shopper choosing on price goes one way and a shopper choosing on choice and convenience goes the other.
- Each chain has aimed its response at what the other is weakest at.
Competing on price: the quickest response and the hardest to win
Definition
Price war: a run of price cuts between rivals in which each cut is answered by another.
- Matching the rival's price removes the customer's reason to switch and takes nothing more than a new price list, which is why it is the quickest response available.
- Undercutting goes further by pricing below the rival to pull in bargain hunters, and it is just as easy for the rival to answer within days.
- Cutting the price leaves less on every sale to cover the rent and the wages, so the shop needs noticeably more customers each week just to stand still.
- Those extra customers are the least likely thing to arrive, because the price was cut precisely because customers had started to leave.
- A price cut therefore forces a second decision, on costs, which helps when it strips out waste such as buying supplies in larger quantities and hurts when it strips out the reason customers came.
Common Mistake
- Cutting the price is the response easiest to reach for and usually the worst one for a small firm.
- A national chain buys in far larger quantities, so its cost per unit is already lower before the price war starts.
- It can also carry a thin margin in one shop out of the profits of hundreds of others.
- A single outlet has neither cushion, so it runs out of cash first even though both sides are losing money.
- Write it as a chain: the chain can hold a low price for longer, therefore it wins the price war, therefore the small firm should fight somewhere else.
Competing without touching the price: product, promotion, place and service
- Every response that leaves the price alone works by making comparison harder, and each one carries a catch.
- Product and quality: add a feature the rival cannot supply, as Dyson does by selling bagless vacuum cleaners on design and engineering at a premium price, although over 5,000 prototypes came before there was anything to sell.
- Promotion: buy attention through social media, local sponsorship or a stall at a school fair, as Gymshark did by selling online through fitness influencers, although a rival copies an offer within a week and the spending then buys nothing lasting.
- Place: sell where you meet fewer rivals per customer, on an estate the chain has not reached or online through a marketplace such as Etsy, although a quieter pitch brings fewer passers-by and a website puts you in front of every other online seller.
- Customer service: know customers by name, take special orders and settle a complaint without an argument, which costs wages and training but is the hardest response for a chain with high staff turnover to copy.
Judging the response: fight on price or fight on difference
- Competing on price can protect sales quickly, but it is only sustainable when the business has lower costs or enough cash to survive the thinner margin.
- Competing through product, service, promotion or place protects more margin and can be harder to copy, but the spending comes before the result.
- Overall, a small firm facing a large chain is usually better competing on a difference the chain cannot easily copy unless it has a genuine cost advantage.
Exam technique
- Trace the chain from the rival's action to the customer effect, the business response and the impact on profit.
- Use the source-booklet business and include the cost or drawback of the response.
- For a judgement, compare a price response with a non-price response and commit to the better fit.
Self review
- Why is competition treated as an external influence?
- Give one reason matching a rival's price is the quickest response a business can make.
- Why does a shop that cuts its price need more customers than before just to stand still?
- Give one benefit and one catch of responding to a rival through promotion.
- Name two things the best response to a strong rival depends on.
