Competing with a Low Cost Competitor

By M. Dana Baldwin

In my previous article, we discussed one way to compete with a lower cost, lower price competitor: differentiation -- defined as finding a significant point of difference, which will allow you an ongoing competitive advantage. However, sometimes differentiation is not enough. Just ask the airlines how well it has worked so far. What else can a company do to succeed in competing with low prices?

Some companies have tried attacking a low price competitor by forming low price subsidiaries. In order to have this work well, there are some basic principles which should be followed. First: a company must recognize that this strategy will be successful only if the original company will become more competitive as a result of setting up the low cost sub. Many airlines tried this approach, but failed because they did not successfully separate the sub from the parent. A successful strategy requires that the low cost sub use a separately recognizable brand name. This helps the sub by changing the expectations of the sub's customers to reflect the lower service levels or product benefits and features which come with the lower pricing.

Second: The lower cost sub should be segregated from the higher priced parent to reinforce the differences. United serviced the United Shuttle and later, Ted, with the same ground and reservations staff and their resultant costs, which really prevented either one of these subs from being as successful as United had expected.

Third: The subs must be launched with a realistic expectation that they are in business to really make a profit. If they are simply there to occupy the space opposite a low cost competitor, and are not intended to make profits, it is highly likely they won't, and will end up being a drag on the parent, at a time when the parent can least afford it.

Fourth: The sub should be very limited in what it is intended to do. Limited product offerings are the rule here. Focus on the specific needs of the market and limit what the sub will do to those which are necessary and sufficient to make it profitable. Do not include all the services and accommodations which the parent can offer. If your product is a technical one, the sub might consider not having technical services available to keep costs and prices low. If the parent can offer quick delivery and is very flexible in the features and benefits offered, the sub should probably be more deliberate in its shipment promises, so it can batch production runs to keep costs lower, etc. The sub's resources should be optimized for its own operation, and not necessarily be the same as the parent's.

The sub should actually be able to compete in the market with its parent as well as the other suppliers in the market place. The one place where there can be synergies in the combined strategies of the parent and the sub is that the positioning of the sub can actually help customers realize the added value of the parent's products and services, and help the parent to sell more higher value to its markets. (More on this in my 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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