Dealing with a Low Cost Competitor

By M. Dana Baldwin

How can you compete with a low cost, low price competitor? Actually, there are many ways one can effectively deal with a lower cost competitor. First, let's discuss price wars: They usually don't work! When your company is competing with a lower cost competitor, you must realize that trying to get your pricing lower than theirs is a true "loser". By definition, they can sell and make a positive contribution to their bottom line at or below a price where you will break even or lose money. All a price war does is to lower the profitability of everyone in the market segment.

So, how can we compete? Let's look at the markets we are currently serving where a low cost competitor is selling, too. What segments of that market do we serve and which ones does the low cost supplier serve? Are they different or are they the same? If they are different, do we have concerns now, and will we have concerns in the future? If we are truly serving different parts of the market, and it is highly unlikely that our low cost competition will enter those segments, we can probably continue to do what we are doing and not worry too much about the low cost entry.

If we assume that this lower cost entity will eventually come after the segments we serve, what can we do? And, if the low cost competitor is currently in our chosen markets, what can we do? The answer is essentially the same in either case, with the major difference being the timing and urgency of our actions.

In many instances, building up the differentiation between their products and services and ours will be the first line of defense. There can be three scenarios which may determine how effective this will be. First, you must be able to persuade customers to pay for the additional features and benefits. Second, to get these added features and benefits, you must continually introduce new and innovative products/services. And third, you must bring your costs in line with the level needed to compete effectively and to support the innovation and development you are pursuing. These three cannot be separated, but must be pursued in concert with each other.

An excellent example of this is in the computer industry. For years, Dell has excelled in market share as a lower price competitor. HP has finally started to catch up, and its costs are coming down so that Dell's lower cost advantage, which used to hover around 20%, is currently more like 10%. With the prices of computers continuing to fall, the pricing difference is getting considerably smaller.

What will this mean for your company? You need to start with an objective analysis of where you stand relative to your competition. Knowledge of your markets needs and preferences should guide your future course and direction in your strategic planning. A good strategic plan is a necessity when a new player hits your markets, so you may react effectively to defend your position, and to determine where you need to go to remain viable and profitable. (More on this in our next article)

Dana Baldwin is a Consultant with Center for Simplified Strategic Planning, Inc.
He can be reached by email at

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