Wednesday, September 15, 2010
Non-price competition: Building the Category
As companies think about rivalry in their industry, they ought to make a crucial distinction between price wars and intense non-price competition. The latter actually can have some very positive benefits for long term profitability, while price wars generally lead to very unfavorable outcomes for many industry participants. Why can non-price competition (rivalry in marketing, merchandising, advertising, etc.) be a positive force? This type of give-and-take among competitors can help grow a product category overall. Take, for instance, the non-price competition over many decades between Coca-Cola and Pepsi. For much of the 20th century, these two players competed intensely, but not on price. In fact, they tended to raise concentrate prices in lock step with one another over long stretches of time, particularly in the latter decades of the 1900s. However, non-price competition such as the Pepsi Challenge and other major advertising campaigns led to growth in the carbonated soft drink market, and it enabled Pepsi and Coke to swamp many smaller players. Too many firms jump to price as the primary competitive weapon, and in so doing, they destroy industry margins. Before worrying about the market share battle vs. the competition, every firm ought to first ask: Can we grow category demand? After all, a rising tide lifts all boats.