Leader’s Trap Examples

A Leader's Trap is a situation in which an established industry competitor maintains a price umbrella and cedes share to a discounting competitor in the mistaken belief that customers will stay loyal to the established competitor by paying a premium for his product. Over time, the company in the Leader's Trap not only loses share, but also sees prices fall to a level near the price established by the discounting competitor.

Leader’s Trap is very common. It occurs in about 80% of the industries who see declining prices, especially for the first time. Sometimes, as you will see from these examples, companies that are in Leader’s Trap in one market are aggressive at pricing in others. For example, see GM and Ford’s pricing against the Jeep Cherokee in 1990. In other cases, even companies known for their sharp pencils in pricing can get caught in a Leader’s Trap. For example, see Wal-Mart’s experiences against Best Buy and Target in 2004.

No. Industry SIC Year Notes
1 2043 1994 Kellogg kept raising prices–6 times in past 3 years–in spite of private-label growth. Rival General Mills just decided to drop its prices.
2 2082 1989 Coors generally followed the price leadership of AB. When it was rolling out its products to new states in the 80's, it did price very aggressively to gain market acceptance. Coors was one of the two brewers that initiated the acceleration of price wars in 1988. Coors and Miller were able to maintain these discounts without AB joining in for a year and a half. During the first nine months of 1989, however, Coors shipments were up by less than a percent.
3 2084 2003 France's Bordeaux and Burgundy regions remain world champions in the high-end segment of wine, where prices start at $12 a bottle. But these account for only about 5% by volume of all wines sold. A group of producers known as the "New World"-Australia, California, Chile, South Africa, Argentina and New Zealand-is eating France's lunch in the much larger low and middle segments, which accounted for around 90% of the $100 billion global wine market. France's share of the global export market fell to 23% last year from 32% a decade ago, while the New World producers' share rose to 20% from 6%.
4 2111 1984 Liggett successfully used volume rebates to sell generic cigarettes in the early 1980s. By 1984, it was siphoning thousands of smokers away from other manufacturers. B&W fought back with its volume rebate plan.
5 3531 1993 Price was commoditized in the 1970s as competitors increased prices 10% a year. Price gaps in the first half of the 1980s ensued as low cost competitors discounted prices. Domestic competitors were slow to react and price has not yet been commoditized again. Caterpillar led prices up to 10% a year in the 1970s and the industry followed. When low cost competitors began to offer discounts, Caterpillar was slow to react and did not match Komatsu's price; Caterpillar was in a leader's trap and subsequently lost share. The price gap eventually narrowed as Caterpillar decreased prices and Komatsu raised. Caterpillar was able to win some share back as a result of flight to qualify.
6 3571 1986 IBM lowered the price of its 5-yr-old PC by 20% for customers who buy directly from IBM. Still, IBM's PC remains several hundred dollars more expensive than many similarly equipped "clones."
7 3571 1987 Apollo invented the engineering workstation. Apollo had a machine that was incompatible with other machines, higher in price and, by most measures, the superior product on the market. In the face of competition, Apollo built machines that were standardize machine, which was cheaper to produce, easier to sell to a varied market, and even easier to discount. Recently, Sun dropped prices on its cheapest work station by 37% to $4995, making it competitive with some PCs. It is now half the price of Apollo's cheapest machine.
8 3571 1991 NEC's UltraLite was the 1st notebook on the market. Now NEC lags rivals such as Compaq and AST Research in both pricing & technology. NEC's new notebook arrived 8 mos. after others were announced. It took NEC 3 mos. to match Compaq's price cuts.
9 3571 1991 In April, Compaq slashed list prices by as much as 34%, but its prices are still relatively high.
10 3651 2004 TiVo was developed in 1997, allowing viewers to pause live programs and record on disc. The market quickly became fraught with competitors. Today, TiVo's overall DVR share is about a third of the market and shrinking as the market has been flooded by cheaper, more efficiently distributed products, including a set-top cable box by Scientific-Atlantic. Often, cable companies like Time Warner Cable are distributing the boxes to customers free in return for a monthly service charge that ranges from $5 to $9. Buying a TiVo at retail costs a minimum of $199 with a $13 in monthly programming fees.
11 3651 2005 Dell's low cost structure, peerless supply chain, and direct-sales model lets it drastically undercut rivals' prices. It recently introduced high-definition 42-inch plasma sets for less than $3,000, with incentives, while Sony and others were selling similar models for more than $4,000. In a matter of months, Dell seized 10% of this important slice of the plasma market in the U.S.
12 3711 1989 Japanese models with comparable performance but lower prices have stolen sales from Porsche's least expensive models.
13 3711 1990 Last month, GM and Ford introduced models similar to the Jeep Cherokee that sell for about $2000-$4000 less.
14 3711 1990 Toyota's 1991 Tercel is $100 cheaper than GM's new Saturn and as much as $1,600 less than other competing models.
15 3861 1997 Fuji is upping the heat despite a 3.7% tariff on all imported film by: 1) Price-cutting resulted in 28% increase in shipments of Fuji film, while Kodak's shipments dropped 11% 2) Fuji is generous with free samples. 3) Analysts expect Fuji's gains in the US to push it past Kodak in worldwide market share by 1998 or 1999. 4) Kodak's 1996 world market share in l996 was 40% vs 35% for Fuji, today to 39% for Kodak vs. 37% for Fuji.
16 3861 2000 In web based photo services, Kodak's joint venture with AOL "You'veGotPictures" flopped. Fewer than 5% of AOL' s members use it. Sites like SnapFish and Ofoto were giving away the picture sharing for free while You'veGotPictures" charged $7 on top of the retailers $9 fee.
17 4213 1985 Immediately after deregulation Overnite was the first to implement across the board discounts. Yellow followed with its own discounts, CF held off until it started losing market share and Roadway remained in the leaders trap until the mid-1980's.
18 4512 1994 By charging 25% to 33% less than established carriers along CA routes, Southwest's market share has soared from 4% in 1987 to 47% today.
19 4813 1991 MCI and Sprint offer CA customers savings in and out of state w/ the purchase of a 1-hr plan. AT&T requires 2 separate full hours for in-state and out-of-state calls.
20 4841 2004 Satellite TV is trouncing cable in the battle for subscribers in rural and urban areas alike. Satellite's success partly reflects the appeal of its offerings, especially to price-conscious households. EchoStar, for example, sells a package of 60 channels for $29.99 a month with free installation. And all these channels are delivered over crystal-clear digital signals. A cable package with roughly the same number of channels – but typically in fuzzier analog format, usually costs more than $40. Satellite also has overcome what used to be its greatest drawback: a lack of local channels, including such desirable programs as the local news. Both DirecTV and EchoStar have been steadily adding local channels since Congress passed a law allowing them to.
21 5331 1992 Wal-Mart has doubled its market share since 1985 to 12% by pricing a few cents cheaper than Toys R Us on nearly every product. Toys responded, but too late as Wal-Mart went from 6-12% share between 85 and 92.
22 5331 2004 Wal-Mart's effort to boost profits by scaling back discounts has dampened sales during a crucial holiday shopping period. The move was to spur profits as the retailer felt it had reached a point of diminishing returns, where discounts weren't producing a large enough increase in sales to make up for losses. Rivals such as Target Corp. and Best Buy Co. were offering better discounts to increasingly cost conscious customers burdened by rising energy prices.
23 5734 1993 As price wars were breaking out between Microsoft, Lotus and Borland, profit margins on software collapsed and Egghead suffered. At the same time, though, Software Spectrum Inc. and Corporate Software Inc. each grew by more than 30% in 1992 by giving big discounts to corporate buyers.
24 5912 1998 In 1998, New London's pharmacy business dropped 10% in a matter of weeks. The reason: CVS had lowered its prices several months earlier. New London quickly matched the prices and sales returned to normal. New London is now the second-cheapest pharmacy in areas populated by senior citizens.
25 6211 2004 Charles Schwab's challenge is to differentiate itself from its competitors. The company has what analysts call a hybrid model, offering different prices and services to investors of different asset classes. Other firms tend to target investors more narrowly by, for example, offering super-low prices to attract customers who are mainly concerned with saving money. Analysts say that no matter how many bells and whistles Schwab may offer, much of the competition in online brokerage boils down to price, an area where Schwab, which long had a basic trading commission of $29.95, fell short. Many of Schwab's rivals charge low fees across the board. Ameritrade, for example, assesses a flat $10.99 fee for stock trades. San Francisco's Charles Schwab Corp. has been losing market share to competitors such as Ameritrade and Scottrade in recent years. That trend continued after the company reorganized its business earlier this year to build services for wealthy investors while raising fees for customers with small accounts. Now Schwab has cut its commissions to $9.95 for those who trade at least five times a month or keep at least $1 million in their Schwab accounts. It's also trying to get out the message that it offers good value.
26 7372 1986 Some makers of spreadsheet programs offer corporate customers unlimited copies for a fixed fee. But Lotus – which resists that practice, called site licensing – still holds nearly an estimated 70% of the market for spreadsheet software.
27 7372 1991 Moving to halt steep market share losses, Lotus for the first time will offer competitors' customers sharp discounts on its industry-leading Lotus 1-2-3 spreadsheet software. It will sell its latest 1-2-3 version to owners of Excel or Quattro Pro for a suggested retail price of $150, or as low as $99 through distributors. The product now carries a list price of $595. Microsoft and Borland have made enormous advances against Lotus recently by offering deep discounts to Lotus users who switched.
28 7374 1995 Aggressive pricing. In this very profitable industry, winners have been gaining share with discounts since at least 1970. NPC discounted against the banks. NaBanco discounted against NPC. FNBO discounted against all Tier 1 competitors.
29 7513 1991 U-Haul cut prices, gaining market share from Ryder. Ryder plans to fight back with price discounts of up to 30% in some markets.
30 7514 1988 Leaders are finally matching/exceeding low price of smaller competitors after losing market share for five years (Hertz share fell from 38% to 32%). Ending Leader's Trap.

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