Page 84 - Selling the Invisible: A Field Guide to Modern Marketing - PDFDrive.com

The Low-Cost Trap

You can make a good marketing case for becoming the low-cost provider.
Your position is clear and so is your price; it’s the lowest a prospect can find.
But the low-cost position kills.
Where are they now, the great low-priced services of our past? The old

synonyms for low-cost retailing—such as J.C. Penney, Montgomery Ward, and
Sears—are dead, dying, or reeling. At this writing, five discounters in the
Northeast alone are suffering even more. Caldor and Bradlees have filed for
bankruptcy, Jamesway is considering it, and Ames and Filene’s are bleeding red
ink.

Low-cost providers take it from several directions. Cutting costs requires
little imagination, and the low-cost position can be seized without a large
investment in brand building. So in most nonretail service industries, the low-
cost provider is a relatively easy market niche to enter. Just when you perfect
your system for reducing costs, someone else devises a better one—as discount
retailers discovered when Wal-Mart jumped in.

Many low-cost providers attain their position through ruthless dealing with
suppliers. Over the short term, that squeezing can work; suppliers who need the
business grudgingly oblige. But those suppliers never become allies. They even
may generate bad word-of-mouth to compensate for the bad treatment they
receive. If those suppliers get a good chance to get out of the deal years later,
they do— gleefully, bad word-of-mouth trailing them as they flee.*

Cost shavers also find it harder to inspire employees. Employees often see a
company’s intelligent austerity as mean-spirited cheapness. Would you like a
windowless, carpetless cubicle forty-five hours a

But this is soft thinking, you say. Where’s the hard data suggesting that low
cost is a trap?

In the Harvard Business Review. In its September– October 1980 issue,
William Hull reported his study comparing companies that stressed
differentiation with companies that competed on cost.

In every measure that mattered—in return on equity, return on capital, and
average annual revenue growth rate—the differentiators beat the tight-wads
every time.

Hull’s study echoed what the people at ADP, the country’s leader in payroll
processing, have discovered. “We will never try to develop a strategy based on
pricing,” CEO Josh Weston had said. “There is nothing unique about pricing.”

Remember this: Most service prospects can find an even lower cost option