Co-Opetition - Adam M. Brandenburger [44]
2. When you win the business, you lose money. If you win the business, you should be a little suspicious. Do you really want to win a customer just because of your low price? No. A customer you win on price alone is telling you he has no loyalty. If you think that getting the customer gives you an opportunity to make money later by raising price, think again: by coming to you, this customer has just revealed himself as someone who will switch suppliers in order to get a lower price. Thus, you’d better make sure that you can make money at the price you offer to attract the customer.
Ask yourself: why is the incumbent letting the customer go? Perhaps the customer doesn’t pay his bills. Perhaps he’s particularly demanding. If this were a good customer to have, your competitor would have kept him. The fact that you were able to steal the customer away should give you pause for thought.16
Sometimes there is a legitimate explanation for attracting the customer. Perhaps your rival really messed up and that’s why the customer is leaving. But in that case you don’t need to use a low price to attract the customer.
In sum, it’s hard to attract someone else’s customer away by using price and then make money at that price. Only if you have a lower cost structure can you afford to undercut the incumbent and still make a profit.
3. The incumbent can retaliate. Don’t think that winning this customer is going to be the end of the game. If this is a good customer, then your win is someone else’s loss. (If it’s a bad customer, then you’ve already made a mistake.) The incumbent supplier is quite likely to respond. He can go after one of your customers. He may not get your customer, but he can surely force you to lower the price. If he succeeds in snagging your customer, then you and your rival have turned two high-margin accounts into two low-margin accounts. And you’ve traded accounts with a relationship for accounts in which a relationship needs to be established. Even if your rival fails to snag a customer of yours the first time, he might try again and continue doing so until he succeeds. The end result: lose-lose.
4. Your existing customers will want a better deal. The price you offered to get the new account is unlikely to stay secret. If your current customers find out how low you are willing to go to get a new account, they will likely demand that you offer them at least as good a price. They may even have contractual provisions guaranteeing them the best price that you offer anyone else. The result of going after the new account, whether or not you get it, is that your existing customers may now have a reasonable case to get you to give them a lower price. That can be a very high cost.
5. New customers will use the low price as a benchmark. The bad precedent goes beyond givebacks to your existing accounts. Think ahead to the next time anew account—someone who is new to the business and has no incumbent supplier—comes knocking at your door. The low price that you offered this time becomes a benchmark in the bidding for the new customer.
6. Competitors will also use the low price as a benchmark. Even if you were willing to risk charging a higher price again in the future, your rivals might expect you to come in with a low price, and these expectations become a self-fulfilling prophesy.
In sum, existing customers, future customers, and your competitors will all use the low price as a benchmark in the future.
7. It doesn’t help to give your customers’ competitors a better cost position. Your future and that of your customer are naturally linked. If your future is tied to Coke, you don’t want to help Pepsi get a lower price. Unless you have very good reason to believe that you can get Pepsi’s business and keep Coke’s, bidding for Pepsi’s business is costly. You help your competitor’s customer and thereby hurt your own.
8. Don’t destroy your competitors