37-The Fate of Price Point Specialists in Hostility
Often, the low-end competitors, we call them Price Leaders, are squeezed out by the industry leaders, whom we call Standard Leaders, introducing low-end products to their product line. This pattern explains the demise of low-end automobile manufacturers, such as Yugo and American Motors. The high-end Price Point specialists, whom we call Performance Leaders, also tend to suffer. The industry Standard Leaders introduce more 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 over time. 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 most 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
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… A tough assignment in an industry with overcapacity.
For the last few years, it has been 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.
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. Performance Leaders offer 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 average performance for lower than standard price. Of the four types, Standard Leaders are the most common and command the greatest share of an industry’s market.
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.
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HOW CAN THESE BLOGS HELP ME?
If you face a competitive marketplace, read these blogs. We wrote them to help you make better decisions on segments, products, prices and costs based on the experience of companies in over 85 competitive industries. Much of the world suffered a severe recession from 2008 to 2011. During that time, we wrote more than 270 blogs using publicly available information and our Strategystreet system to project what would happen in various companies and industries who were living in those hostile environments. In 2022, we updated each of these blogs to describe what later took place. You can use these updated blogs to see how the Strategystreet system works and how it can lead you to better decisions.