84-Slowing a Price Decline with a Low-Priced Product

As long as business has existed there has been a constant challenge of competitors offering low prices to the customers of competitors offering a fuller product at a higher price. This blog describes several of those confrontations and suggests some rules for the higher priced defender to follow.

Posted 3/2/09

For the last several years, most landline telephone companies have offered special discount deals to customers who threaten to cut their landline service. But the trickle of customers leaving landline service, and depending solely on cell phones, has turned into a stream.

Verizon believes it has at least a partial answer to slow the customer defection from the landline business. The company is considering introducing a $5 monthly voice plan that would allow customers to receive unlimited calls but dial out only to 911 and Verizon Customer Service. This is a new low price point in the market. This price point compares with the Verizon unlimited nation-wide home phone plans which start at $40 a month.

Verizon is pricing defensively, trying to keep customers from leaving the company for cheaper pastures. In order to develop this defensive pricing plan, Verizon made three choices: the approach to take, the segments to serve, and the components of price to use to serve those segments. For many more examples of these three choices and how they defend both market share and margins, see our new Perspective, “Meeting Falling Prices with Creativity” in the Perspectives section of StrategyStreet.com.

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Update 2022:

The technology formerly used to make calls on landlines, called ‘analog’, has been replaced with an internet-based version, called an ‘IP network’. Landlines still exist, and you can have a phone line in your home – but the system that underpins it will be digital.  Across the telephone network, home phone providers have moved to a digital dialing system.

In 2020, the cheapest landline services without internet include:

• CenturyLink – Basic Home Phone starting at $23.34/mo.*
• Cox – Voice Premier starting at $29.99/mo.*
• Spectrum – Spectrum Voice Basic service starting at $29.99/mo.*
• Verizon Fios – Digital Voice Unlimited Plan starting at $20/mo.*
• Xfinity – Xfinity Voice Local starting at $34.95/mo.*

These telephone companies are offering a Price Leader (Stripper) product Price Point in order to maintain a relationship with a customer who might leave without the low-priced product. In most cases, the telephone company is seeking to maintain a Primary Role with its customer, foreclosing an opportunity to another competitor. See HERE for more explanation on roles with customers.

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Update 3/26

By 2026 the survival of telephone land lines is old news, not worth pursuing. However, there is a broader concept here worth considering. How does a Standard Leader competitor confront a Price Leader competitor taking share and threatening the price of the Standard Leader Product?

To address that question let’s look at a few examples of this confrontation. In each case, the Standard Leader developed a specific Price Leader product to fend off the attacking Price Leader competitor. The legacy airlines had to face down the ultra-low-cost carriers with Basic Economy. Procter & Gamble faced off against private label consumer package goods competitors with its Basics and Essentials lines. Microsoft in its Office product faced Low-Priced Google with its free Microsoft online product. Target confronted Amazon Basics with its Smartly products. Nike parried low-end shoes such as those from Payless with its own low-end shoes, such as the Revolution line. Marriott answered the budget hotel challenge with Fairfield Inn. T-Mobile and AT&T met the mobile virtual network operators with products such as Metro and Cricket.

Notice first that both the Price Leaders and the answering Low-Priced products from the Standard Leaders had to reduce Function to be successful. Much of the cost structure of most products derives from the Function benefits the product offers the user. Both the attacker and the defender products reduced Function in the form of lower quality materials, less design, less service and support and lower levels of performance. The airline seats were smaller and closer together. The hotel rooms were smaller, offered basic bedding, fewer amenities and less support staff. The low-cost Office suite offered limited formatting and no enterprise features. The consumer package goods products had less softness and strength, fewer variants and basic packaging. Few opportunities exist to reach a low price without substantial reductions in Function benefits. Sometimes, the reduction in Function also causes a decline in Reliability due to the lower quality components of the Price Leader product. Also, both the defender and the attacker may reduce some Convenience benefits to reach their targeted low prices.

On a hopeful note, we should recognize that the defensive Price Leader product need not necessarily reach the same price level as that of the attacker. Usually, defensive Price Leader products close a good part of the gap in Price between the Standard Leader and attacking Price Leader product but do not close it entirely. There is usually some additional price margin left to the defender.

A defensive Price Leader product is a success if the product meets three strategic objectives:

–It stops Price Leader specialists from gaining share and reducing their costs further, enabling them to maintain low prices for longer.

-It retains Price Leader customer purchases in the defender’s ecosystem to protect share, maintain presence in the consumers’ mind and provide the company with additional cash contribution.

–It prevents price erosion in the core Standard Leader brand.

Successful defensive Price Leader products seem to share some common characteristics:

-The product has a clear identity.

-The product has its own distinct cost structure.

-The product often benefits from its Standard Leader brand reputation.

These are challenging objectives and product characteristics. Not everyone can meet those challenges. Those who cannot are likely to face unrelenting price pressure.

But the market may be telling us something if the defending company cannot stop the attacker. Any attacker finding success at the Price Leader Price Point will inevitably move up to offer its version of the Standard Leader product. If the defending company is unable to stop the attacker while they are challenging at the Price Leader end of the market, it is getting an urgent warning to re-examine its own value proposition and, especially, its current cost structure. Something has to change there, or the defending company is staring at the likelihood of a long-term decline.

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