How me-too pricing works.
The number two brand almost inevitably enters at a price point just below the market leader to grab market share.
Whatever is left over after the two big guns argue it out is what everyone else gets access to.
The main challenger brand uses the leader’s price point as a pricing precedence.
While the product category is in its growth phase (on the lifecycle) new entrants are attracted into the market.
This is because there is less risk – they know a market exists for the product because the leader has assumed the risk and built the customer want.
If you’re the challenger brand, pricing at or just below the market (depending on the strength of their brand) is the most common strategy used to grab market share at the mass-market penetration point.
What most businesses need to do.
If you are not the number one or number two brands in your product category, what do you do?
Apart from the obvious (your price needs to cover your costs and then earn some more), you have a number of choices.
Depending on where you want to position your brand in the minds of consumers, you can price above the market, below the market or at the market.
Without a brand that means something in the minds of customers, you will struggle to sell your product on any attribute other than price. This is because branding is the mechanism that businesses use to differentiate their products from competitors for the purpose of facilitating sales. If nothing else, if you don’t want to be the lowest cost provider, you must build a brand. (Head to Brand Strategy for information about how this is achieved.)
TABLE 1: STRATEGIC SUMMARY AND ACTION REQUIRED:
Most businesses want to sell on factors other than price.
This is often because if a business competes primarily on price, its price cuts may be matched or even easily beaten by larger competitors.
There are no real winners in a price war.
Furthermore, the average consumer typically associates a low price with low product quality.
Once a consumer thinks a brand is cheap, it’s almost impossible to get them to change their minds about it.
For example, who believes that eBay sells the best quality? No-one. Most people believe it’s akin to a giant garage sale.
If you have the right attributes to support your brand positioning, you can potentially charge a premium providing the customer values the attributes you are offering and is prepared to pay a premium for them.
TABLE 2: PRODUCT ATTRIBUTES TO CONSIDER WHEN SETTING ABOVE THE MARKET PRICING:
Changing the pricing technique altogether.
If you are going to compete in the me-too environment, you can also use some of the more common pricing techniques that apply to making prices hard to compare.
These offer some tactical opportunities to remove you from the battle between number one and two brands by making it more difficult for customers to compare pricing.
Ultimately, there is room in most markets for 2 big me-too brands.
One is the market leader and the other is the serious number two challenger.
For businesses operating at number three level or lower, it’s a very difficult position to hold.
A better course of action may well be considering establishing a new product category by making changes to the core offering or the way the offering is delivered so you can take leadership in a new product category.
READ: More about pricing strategy.