Question

How to Compete with Cheap Knockoffs of Your Successful Product

Sisters Jenifer and Sarah Kaplan admit that the designer high heels and stilettos that they wear often end up hurting their feet and causing them to quietly slip off their shoes whenever they can. They, like many women, were willing to put up with some degree of discomfort to be able to sport the latest "must-have" shoe. Little did they know that their fashion persistence would lead them to become entrepreneurs. After graduating from college, the sisters realized that many women suffered from the same uncomfortable shoe problem and launched Footzyrollupz, a company based in Miami Beach that sells comfortable flat shoes that women can roll up and discreetly slip into a small purse, clutch, or handbag, car glove box, or desk drawer.

As growing numbers of women discovered the simplicity and usefulness of Footzyrollupz, the company’s sales increased quickly, which attracted competitors. Large retail stores began selling cheap knockoffs of their rollable yet comfortable and stylish shoes at much lower prices. “We had to differentiate ourselves from the $10 version at Target," says Sarah, "So we went with tiered pricing.” The sisters decided to introduce a lower-priced Everyday Collection that sold for $20 per pair and a higher-end line called Lux that sold for $30 per pair. The strategy was successful, and the impact was immediate.” We had a 100 percent increase in revenue,” says Sarah. "We actually have had the most interest in our higher-priced shoes," says Sarah. Buoyed by the success of their initial pricing strategy, the Kaplan’s now offer Footrollupz shoes at three general price levels: basic models that start at just $22, mid-range shoes that are priced around $36, and a luxury collection that sell at prices from $55 to $69.

1. By refusing to engage in a price war with competitors and using tiered pricing, the Kaplan’s were able to generate additional sales without portraying their company as a bargain-basement discount seller When their company’s sales began to decline due to a weak economy and competition from cheap knockoffs, the Kaplan’s knew that they had to reevaluate the pricing strategy of Footrollupz but refused to be drawn into a price war. What are the signs that mean it is time to consider changing your company’s pricing strategy?

Unit sales growth slows or declines. When sales volume stalls or declines, the market may be saturated, the economy may be struggling, competitors could be stealing away your customers, or your prices are out of line with customers’ perceived value of your products and services.

2. Discounts fail to increase sales. The reason that companies offer price discounts is to increase sales, ideally by a greater percentage than the discount. If a discount fails to
produce results, continuing to offer it is a recipe for disaster. ” Price cutting usually is not the best strategy for a small business-especially a business that serves a target market that cares more about value and service than paying the lowest possible price,” explains one business writer. ”Not only does discounting generally fail to help you acquire new customers, but it may also result in your making less money from the customers you already have."

3. Competitors introduce new products or services. innovations by competitors can change-sometimes dramatically-the price-value equation in the market.” if the competition has leapfrogged you on value, you may not be able to maintain your current pricing strategy,” explains one pricing expert.

4. Low-cost competitors enter the market. When a market is experiencing high growth, it often attracts new entrants. If those new competitors have lower cost structures and utilize penetration pricing strategies, their entry can muddle the entire industry’s pricing structure. When faced with this situation, some companies engage in a price war, but others take different approaches, such as introducing fighter brands or moving into less-price-sensitive niche markets.

5. Gross profit margin declines. A company’s gross profit margin = (Sales - Cost of goods sold) / Sales. The only ways to repair a gross profit margin that is too low is to either reduce the company’s cost of goods sold or increase its prices.

Question one: 25 Marks

Explain the dangers of discounting as a pricing strategy for increasing sales. (250 words)

Question two: 50 Marks

Use the Internet to research price wars. What conditions usually prompt price wars? What impact do price wars have on an industry and the companies in it? What outcomes are typical in a price war? (500 words)

Question three: 25 Marks

Many small companies compete successfully without focusing on providing the lowest prices, even in industries in which customers view product or service prices as important purchasing criteria. What tactics do these companies use to compete successfully without relying on the lowest prices? (250 words)

Answer 1

1. Following are the dangers/side-effects of using discounting strategy to increase sales:-

• Discounting attracts customers in the short-term. However, it decreases the reference value of the product for the customers. The customers lower their reservation price for the product. If the company wants to put its price to normal level after certain duration, customers may abandon buying the product as their reference price has gone down.
• Discounting also reduces the brand perception and in turn, brand equity of the company. The customers tend to associate the company and its products as cheap brands.
• If a well established competitor starts to engage in price war, then the game is virtually over. There is no winner out of a price war. The winner gets all its products sold at an extremely lower price while the losers have to leave the market. So, using discounting strategy in a market with established competitors may result in bankrupting the company.

2. The conditions that prompt price wars are mentioned below:

• Intention of achieving greater market share for a product/product line
• Intention of increasing sales of a product whose sales have been declining in the recent period
• Intention of ousting competitors and making them bankrupt with virtually zero sales

Out of all these, the last one is most brutal as some cash rich companies start selling products below cost price to make the competitors bleed out money and when their cash reserves deplete, they will be forced to quit the market.

Some of the typical outcomes of a price war are:

• All the participants in the market incur loss in terms of lower sales price
• Some competitors are forced to bleed out money heavily. In worst case, they go bankrupt and eventually leave the market
• The winner is generally well-established company with huge cash reserves
• However, the winner also loses a lot of money in terms of forgone revenue
• The customers benefit in terms of lower price for the same product
• The reference point of product decreases in the mind of customers

Price wars generally have a negative impact on the whole industry and the participating companies. It is usually advised not to engage in price wars as no winner emerges out of this. Everyone loses money from the present scenario.The industry valuation also decreases and many companies are taken over by competitors or other large companies since they almost deplete their cash reserves which is the operating system for the sustenance of a firm. The losers have to pay a heavy price and are generally taken over or shut down. So, engaging in price war should be last alternative for any firm.

3. The companies which are successful while relying on price wars use one or more of the following tactics:

• They try to differentiate the offering in terms of features/sales support etc so that their product do not face direct competition
• They try to serve niche segment of customers with customized offerings. This segment is often overlooked by mainstream companies.Also, these customers are not so price-sensitive.
• They introduce flanker brands to fight competiton. These brands target the weak spots of market leader and offer unique business value in terms of geographical region/feature. This helps to attack the market leader from the front.
• They also sometimes use fighter brands (low cost version of products) to fight competition. These fighter brands are backed by large cash reserved to sustain competition for a longer time. However, the original product is still sold in market at normal price so that the brand value doesn't degrade.