Avoiding Price Wars

Two professors writing in the winter 2004 issue of the MIT Sloan Management
Review proposed a solution in their article, 'The Seller's Hidden Advantage'.
Their idea, developed from research involving 1,500 corporate managers, makes
use of the sellers' 'bird's-eye view of the forest' to see a solution in
one industry or one part of the world and transfer that knowledge to customers
in other industries and geographical locations.

Manufacturers' profits-whether earned by making cell phones, DVD players,
or any other widely used product-continue to get battered by unrelenting
commoditization. As product life cycles shrink, moving faster from early
adoption to mature markets, manufacturers can no longer count on many early
years of high profit margins.

The
twin forces of rapid product innovation, which speeds product obsolescence, and
fast followers, who quickly churn out lower-priced copies, rapidly drive prices
down. By transferring proven solutions that help customers lower their costs and
risks, sellers gain 'customer loyalty, pricing flexibility, or both,'
according to Professors Niraj Dawar and Mark Vandenbosch.

The response of manufacturers to commoditization? Become the low-cost
producer. But, since much of today's production is outsourced to supply chain
partners, turning into the low-cost producer also means becoming a commodity
buyer.

Rajesh  Rege

Then spiraling price deflation gets worse as corporate buyers spread the pain
deep into the supply chain by renegotiating supply deals, forcing suppliers into
online reverse auctions, or requiring multi-round, target-priced bids.
Value-added services are also affected as purchasing agents bundle product
requests for proposals (RFPs) with performance, delivery, and warranty
guarantees.

Breaking the price spiral

By transferring proven solutions that help customers lower their costs and
risks, sellers gain customer loyalty and pricing flexibility, or both. The
pricing flexibility yields higher profit margins, which is the seller's reward
for lowering their the customer's total cost of ownership, rather than just
lowering the initial price.

- For sellers, the key to success is to develop the ability to identify,
capture, categorize, and retrieve knowledge across all their customer
relationships, linking a new solution to a tough customer problem. Why does this
result in a competitive advantage? Although the idea is simple, the execution is

challenging.

Rajesh Rege is Director-Sales, Sun Microsystems