If you feel tempted to drive one of your competitors out of the market using low prices, you’ll quickly discover you’re the loser.
In a June 3, 2011 article in Booz & Co.’s strategy + business entitled A Sweet Victory, Reed Holden and Mark Burton highlight Hershey’s victory over Nestle in the Krackel vs. Crunch war.
Using an aggressive pricing strategy, “...a 30 percent trade discount on Krackel where other brands hovered in the 5 to 10 percent range,” Hershey drove Nestle from the vending machine market “...boosting the brand’s [Krackel’s] revenue by an incremental $25 million.”
Let me see if I have this right. Hershey is shifting production capacity to produce an additional $25 million dollars of candy bars at a margin that’s 20% to 25% lower than the industry average and they think they won. It’s 8:30 on a Friday morning and I feel like I need a drink already.
The thing that amazes me about strategies like this is they always focus on the additional revenues generated, not the profits. In other words, they’re looking at market share instead of profitability. I guess if that’s your measure of success, you did win.
But for those of us who measure success in terms of profits generated, Nestle is the hands down winner in this one. I’m sure Nestle didn’t sit around bemoaning this loss. It merely shifted its resources to markets and products that produce higher margins. The best and brightest simply don’t play the fool’s game of following a ‘competitor’ down a path of rapidly decreasing prices.
So what’s the message here? If you feel an inclination to drive one of your competitors out of the market using low prices, do the math and you’ll quickly discover who the loser will really be. And it won’t be your competitor.
Dale Furtwengler is the author of the internationally acclaimed book, Pricing for Profit. His company, Furtwengler & Associates, Inc., helps companies get higher prices regardless of what their competitors or the economy are doing. For more pricing/branding/marketing/sales tips visit his website, PricingForProfitBook.com.