37-The Fate of Price Point Specialists in Hostility

What product Price Point would you like to specialize in during a Hostile market? Sometimes, it seems like competitors offering premium products are in the best situation. Their product prices and profits seem high and comfortable. Think of the high-end of the automobile business in the 90s. In other markets, it seems like the low-end competitors have a long-term advantage. Think of the airline business in the 2000s. In most markets, the middle reigns. There are four typical price point competitors in an industry. Here is an illustration of how three of them compete in Hostile markets.

Posted 7/28/08

As a market works its way through overcapacity and Hostility, the industry’s Price Point specialists come under extreme pressure.

Often, the low-end competitor, we call them a Price Leader, is squeezed out by the industry leader, whom we call a Standard Leader, introducing low-end products to its product line. This pattern explains the demise of low-end automobile manufacturers, such as Yugo and American Motors. The high-end Price Point specialist, whom we call a Performance Leader, also tends to suffer. The industry Standard Leaders introduce their high-end products and pull enough volume from the Performance Leaders to cause them economic hardship.

Many of the Performance Leader companies are purchased by Standard Leaders in Hostility. An example is Ford’s purchase of Volvo and Jaguar when Ford was still a strong Standard Leader. Today, the Japanese automobile manufacturers set the standards for the auto industry. They offer products at all three price points, from Price Leader to Performance Leader, and present a strong challenge both to other Standard Leaders and to the remaining independent Performance Leaders in the automobile industry. (See the Perspective, “Why Do Leaders Lead?” in StrategyStreet.com/Tools/Perspectives.)

Even the airline industry is starting to see pressure on the Price Leaders caused by Standard Leader cost-cutting. Until recently, the Price Leaders in the industry, such as Jet Blue, Virgin America, Air Tran and even Southwest, had been protected by the onerous work rules that the unionized workforce imposed on the legacy carriers. But bankruptcy, or its threat, enabled the legacy carriers to reduce some of their cost disadvantages. Now even the best of the Price Leaders in the industry feel the sting of intense competition. At the other end of the price spectrum, no Performance Leader airline in the industry has survived more than a very few years during hostility. All are now gone.  Performance Leader specialists in the airline industry are rare to nonexistent

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Update 2022:

The superior economies of scale of the airline Standard Leaders, along with their willingness to offer Price Leader products, gradually squeezes out weaker Price Leader competitors.  Business Insider identified several low cost air carriers that went out of business in 2020, including Compass, ExpressJet, Ernest and TransStates.  A low price for a product, by itself, does not produce a loyal customer. To continue to attract the volatile, price sensitive customer, a Price Leader must maintain a cost structure significantly below that of the industry Standard Leaders to keep its pricing very low, often more than 25% lower… A tough assignment in an industry with overcapacity.

For the last few years, it has become more difficult for the low-cost carriers to thrive in competition with the legacy airlines. The low-cost carriers offer about 10% of their individual flight capacity at very low prices and then gradually raise the price as flight occupancy rises until their prices are comparable to those of the competing legacy airline. Aside from losing some of its price advantage, a low-cost carrier has difficulty entering or expanding in an airport dominated by the legacy carriers because of limited gates and take off slots.

By 2022, the automobile industry continues to consolidate around the largest competitors.  There are many examples of Standard Leader companies introducing or acquiring products that put pressure on Price Leader or Performance Leader product segments.  Korean manufacturers Hyundai and Kia introduced Performance Leader products over the last 10 years.  The Volkswagen group includes automobiles branded Skoda, Seat, Cupra, Audi, Lamborghini, Bentley, Porsche and Ducati.  The Lexus and Infiniti brands were introduced by their Japanese Standard Leader parents in the late 1980s.  BMW now owns the Mini brand and Rolls-Royce.  Tata motors owns today’s Jaguar and Land Rover.  And the Chinese automobile company Geely owns Volvo.  GM and Ford have moved in the opposite direction, eliminating brands, especially higher end brands, as the two companies struggled for profitability under extreme cost constraints. The loss of these brands has contributed to the share losses these companies have felt.

Here is a short explanation of the 4 Price Points. We did not cover Next Leaders in this blog.

Value is the combination of the performance each supplier offers the customer and the price the supplier demands for that performance. Generally, increases in performance raise the cost of a product so the performance and price components of value usually move in tandem. Each competitor in an industry develops as one of four Price Point specialists. Each company must make tradeoffs to balance performance and price in the value it offers customers. The first place this tradeoff occurs is in the choices a company makes to offer Price Points.

The first Price Point specialist, a Standard Leader, offers the industry’s most common products, with average performance and prices. Two other Price Point specialists follow contrasting paths in offering customer value. A Performance Leader offers products with above standard performance in return for higher than standard prices. Price Leaders offer prices well below standard for products with lower than average performance. Finally, some industries produce Next Leaders. These fortunate companies offer a niche segment of customers better than Standard performance for lower than the Standard price. Of the three types we covered above, Standard Leaders are the most common and command the greatest share of an industry’s market.

See a “Leader’s Comparison” Chart >>

The Price Point classifications apply at the product level as well as at the company level of competition. Every product, as well as every company, fits one of the Price Point classifications. Each of the four types of Price Point specialists has the potential to offer products to compete with other Value Leaders. For example, Standard Leader Toyota offers a Performance Leader line of automobiles with the Lexus brand. Standard Leader Marriott International competes at the Price Leader end of the lodging industry with its Fairfield Inn product. Standard Leaders can, and often do, offer products to compete with all three of the other Value Leaders. Performance Leaders and Price Leaders may also offer products in other categories, especially in the Standard Leader category.

For more detail, go HERE.

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Update 10/25

Most industries offer a range of Price Points from low to high. Let’s look at a few industries with characteristics tending toward either end of the price spectrum and then see a couple where the middle dominates.  Then we can examine what differentiates these markets from one another.

Markets where Performance Leaders (High-Priced competitors) perform particularly well. High-Priced competitors perform very well in any market where luxury is the hallmark. These markets include watches, jewelry, fashion, wine, coffee and athletic footwear. In each of these markets, Performance Leaders offer Function or Reliability benefits to a price insensitive customer base. The Function benefit could include style or a particular physical benefit. All successful Performance Leaders excel on Reliability as well, especially by offering prestige brands. Less frequently, a Performance Leader may lead on Convenience. An example might be convenience stores, whose prices are higher than grocery stores, but they offer faster in and out for the shopper.

Markets where Price Leaders (Low-Priced competitors) perform well. These markets include the airline industry until the last couple of years and the color TV industry of the 90s, and increasingly, of the last few years. Both of these industries saw the industry leaders caught in a Leader’s Trap, providing a price umbrella over expanding price-based competition. Sometimes customers must give up Function, Reliability or Convenience benefits to get their lower prices. Costco has wonderful prices and limited selection (Function). Quick service restaurants may offer spotty quality (Reliability). Luxury outlet stores offer some branded items but in less accessible locations (Convenience).

Markets where Standard Leaders (mid-priced competitors) dominate. Most markets evolve toward this model. Why? These competitors tend to offer Price Points at both the Performance Leader and the Price Leader Segments. Some do this with acquisition, others through internal development. The best of these Standard Leaders use their superior size to develop and exploit economies of scale and pricing that  other market participants cannot match. Good examples of these markets and their leaders would include automobiles, with Toyota, and lodging, with Marriott.

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