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