Co-Opetition - Adam M. Brandenburger [91]
If you’re selling to a mass market, then, just like Adam you can refuse to negotiate. Instead, you get to set a price. What other rules might you want to impose?
At first glance, there’d be nothing to gain by imposing a most-favored-customer clause in a consumer market. If you have the power to set price, there’s no issue of customers pushing for special deals. But, in fact, there is still a reason to consider an MFC. Though customers may be unable to negotiate, they can postpone buying. They may do just that if they’re not convinced that you’ll hold firm to your price. The more customers that wait, the more pressure you’ll feel to lower price. The customers’ belief that price will fall becomes a self-fulfilling prophecy. Granting an MFC helps you get out of this trap.
January Sales In 1990 Chrysler used a variant of an MFC to change the game of selling cars. The way car buyers played the game is that they would wait for end-of-year rebates, and, by waiting, leave the dealers with large inventories, which would then force the manufacturer to offer these rebates.
Chrysler wanted to convince customers that there would be no gain from waiting. Mere words wouldn’t have been credible. What Chrysler did, as can be seen from the advertisement reproduced on the next page, was promise people who bought a car in January that if it offered a larger rebate later in the year, it would go back to them and make up the difference.
Chrysler’s guarantee had two effects. Customers now had no incentive to wait, so end-year inventories were smaller and end-of-year rebates weren’t as necessary. Moreover, Chrysler was now less tempted to offer rebates to clear out whatever end-year inventory did remain. It would be too costly to go back and make refunds to everyone who bought in January.
Many retail stores offer thirty- or sixty-day price protection. The motivation is similar to Chrysler’s. Every Day Low Pricing (EDLP) policies are another rule that retailers use to convince customers not to wait for sales, and, in this way, stop themselves from being forced into having a sale.
How about the use of a meet-the-competition clause in a consumer market? Here, there’s a catch. You can offer to meet the competition, but you can’t force consumers to buy from you if you do. Most of the time you don’t have a regular contract with your customers. When you do, it’s not the kind that will tie them down. Try to imagine a potential car buyer signing a contract that gives Chrysler the option to match any offer made by Ford. Not very likely. Why would anyone ever sign such a contract?
So in a mass-consumer market, you can’t quite make any rule you want. You can only make rules concerning what you do, not what the customer does. If you can’t have an MCC, can you achieve essentially the same result by simply announcing your intention to match the best price in the market? Not entirely. A guarantee to match any competitor’s price is not the same as an MCC. Consumers don’t have to give you the option to match.
Some retailers do use a best-price guarantee to good effect. British retail chain John Lewis has as its motto “Never Knowingly Undersold.” It is quick to reduce its price if it discovers that the same item is available for less elsewhere, and thus has a well-earned reputation for having the lowest price. The result is a very loyal customer base.13
A best-price guarantee doesn’t work as well when what you sell is more idiosyncratic. Suppose that Chrysler tried to offer such a guarantee—say, on its Neon model. What’s the comparable Ford, GM, Toyota, or Hyundai car? With respect to which models, with which options, would the guarantee apply? However Chrysler framed its guarantee, it would expose itself to considerable risk. If for some reason—a move in exchange rates, say—the price of a comparison model fell, Chrysler could be forced to match a price that would cause it to lose money.
Since you can’t have an MCC, and giving a best-price guarantee isn’t always practical or wise,