In the mature, highly competitive markets of today there is always a current or new competitor lurking in the wings ready to try and entice your customers away with a special offer, lower price or promise of better service. In this guide, we will be examining how you can respond to competitive threats and ways in which you might protect yourself from them.

Value your customers

The first rule of competition is the most critical because it will help you to keep your focus on what really matters: the customers, not the competitors. If you treat today’s customer well, then you are likely to have a loyal customer base that is unlikely to be easily wooed away from you. When it comes to your customers, you need to:

• meet and exceed their expectations,
  
• delight them with your service,
  
• keep your promises,
  
• communicate with them honestly,
  
• use your experience of them and their needs to add value to your service to them,
  
• work in a partnership with them to resolve their problems.

Valuing customers

1. If an average customer of today was to stay loyal to you for five, 10 or 20 years do you know what the total value of all their business would be over that period?

   a) Value over five years.

   b) Over 10 years.

   c) Over 20 years.

2. If one of your customers had a requirement and the product or service you could offer was not really suitable, what approach would you or your staff take?

   a) Present your product and hope the customer does not notice.

   b) Point out the limitations but hope the customer will still choose you.

   c) Point out the limitations and recommend an alternative product or supplier.

   d) Point out the limitations and offer to arrange for a more suitable alternative on their behalf.

3. How do you incentivise your front line or sales staff?

   a) On sales (i.e. encouraging a transaction approach).

   b) On building relationships (i.e. increased average spend per customer, reduced lapse rates and customer satisfaction measures).

4. How would you rate your communication with your current customers?

   a) Purely reactive – we speak only when spoken to.

   b) Sales-focused – we tell them about things we want them to do or buy.

   c) Chatterbox – we are always sending them information, newsletters and mailshots or calling them up. We tell them about our business, our staff and the industry, as well as the latest sales information. We are less sure if they are listening or care.

   d) Proactive – we take trouble to listen as well as talk. We have systems to collect feedback. We hold user groups, and senior staff make a point of meeting and talking to customers regularly. We involve regular customers in most key decision-making. Communication with them is carefully planned and designed to add real value to their business. We provide industry updates, product information and general hints and tips. We keep in close personal contact with key customers by email or phone and we make sure that the frequency and style of our communication suits our client base.

5. A customer relationship and history should provide the business with information which allows you to add real and relevant value to the services you provide. The hotel that pre-completes registration forms and knows what daily paper you prefer is using their client database effectively. How well do you use yours?

   a) We do not have a single reliable and effective database.

   b) Client information is limited to contact details and sales history; anything else is in the heads of the staff.

   c) We have information which enables us to segment our customers and tailor our sales offers more directly and specifically.

   d) We have taken time to consider how and what information would help us improve our service and let our customers know we recognise and value them. We collect and update these details regularly.

If you have answered these questions honestly, you will be able to see you can improve the ways in which you value and listen to your customers.

Loyal customers are the best defence

Loyal, satisfied customers have no reason to risk trying out competitors’ offers. Organisations that appreciate the lifetime value of customers and work hard at building and maintaining the relationship have less to fear than those who pay lip service to the notion of customer service and satisfaction, or businesses where today’s sale is more of a priority than tomorrow’s repeat business.

Take competitors seriously

Having emphasised the need to keep a focus on the customer, it would be naïve to suggest you can ignore the competition. Remember, it is your customers who will decide who your true market competitors are. This may not be the market leader or the latest new entrant into your market. Identify your key competitors and make it your business to keep up to date with their strategy and tactics.

You should be aware of:

• their pricing policy, including discounts and deals as well as rate card prices,
  
• details of any business terms on offer,
  
• special promotions available, their type, value and frequency,
  
• product modification or changes made,
  
• alterations in availability, longer opening hours or home delivery.

Whatever the purchase, be it a consumer good or a business-to-business service, customers make purchase decisions in the same way.

The decisions are made on the basis of the customers’ perception of value for money. Understanding this reality is important for two reasons:

1. Your product may be better, quicker or cheaper than the competition, but this will only influence purchasing decisions if the customer believes this. The fashionable dress store with no prices in the window may in fact stock a wide range of affordable outfits, but be assumed by the customer to be too pricey for her.
   
2. Generally, customers do not buy simply on the basis of price. Value, in the form of services or benefits, is a vital part of the equation. However:

You may be offering benefits customers do not value or want, so are not prepared to pay for. For example, the garage repair business that includes in its price the cost of a ‘collect from home service’ and the provision of a loan car, may be judged expensive when compared with the competitor offering none of these services.

A competitor may be including a service or benefit in their offer that is highly valued by the customer. For example, an interest-free loan or extended service agreement.
If you are losing customers or failing to win new business it is important to ascertain whether your problem is based on perception, or if your offering is not matching customer requirements. The first is solved by communication and education. The second requires you to go back to the drawing board to design a package which meets the customers’ requirements. Product-focused organisations are those most likely to have ended up with an over-engineered product providing lots of features which have added to the cost but which do not add customer value.

Customers have their own list of expectations and needs. When they go to buy a new office photocopier or computer system, these may be formally laid down in the form of a specification. In consumer markets the requirements may be less formalised but are nonetheless established, from the minimum leisure facilities at a holiday destination to the performance expected of a new car. The customer sets out with the shopping list made up of benefits needed. These are the core benefits, in other words, the basic functional needs. For example, a mobile phone service may need to cover Europe and expected benefits could include special prices at weekends, a breakdown of the bill and an international enquiry system.

Meeting the culling criteria

These core and expected benefits represent the customers’ ‘culling criteria’. In other words, they will only consider suppliers who meet these criteria and will reject those that do not. It is important that you identify and monitor the culling criteria of customers in your target market as they can change; for example, increased awareness of the need for energy conservation may change expected requirements when choosing a new gas boiler or replacement windows.

Where competition takes place

Competition takes place between suppliers who have satisfied the cull criteria. If all the companies now offer the same deal and they have benchmarked or copied each other in an attempt to be more competitive, the customer is left with no choice but to choose on the basis of price. The market has then commoditised because, from the customers’ perspective all the alternatives are equal in terms of the benefits offered.

Differentiation means that companies add benefits designed to distinguish them from the competition and which they believe will be valued by their targeted customers. The better you know your customers, the easier it will be for you to identify the added-value benefits they appreciate. If you are successful, you will establish a competitive advantage.

There are two problems associated with adding these (augmented) benefits:

• If your added benefits are easily copied they will quickly become expected, so you need to be constantly alert, seeking new opportunities for differentiation.
  
• If you add benefits that are not valued or appreciated you are simply increasing your costs and you will be less competitive in value-for-money comparisons.

The challenge businesses face is to find augmented benefits valued by their customers, but which cannot be easily copied by competitors. During the time this utopia can be achieved, businesses can enjoy the commercial benefits of having a sustainable competitive advantage. Because this is harder to achieve with new, improved features, most organisations are focusing on service, relationships and brand values to provide a basis for sustainability. Today, what you offer is less important, as most companies offer the same; differences are perceived in how you do business.

Coping with low-cost competitors

The reality for many firms is they are faced with lower-cost competitors, so how should you react?

1. Review the product or service you provide. Check what you offer against what the customer values and re-engineer your offering to provide a better match. Make certain you know what drives cost in your business and that you can build on the optional extras and differentiators valued by the various groups of customers you service.

   Tip

   Do not assume or treat all customers the same. Some will want the basic service while others require de luxe. If you try and offer everyone a level of service somewhere in between, you will please neither group and be vulnerable to competition for both groups of clients.

2. Pro-actively build relationships with your current customer base. Work to reduce the opportunities when they may be vulnerable to competitive approaches. If the hairdresser calls to book the next appointment the client is less likely to pop into a new salon on impulse.
   
3. Avoid head-to-head competition. Price wars, in particular, can be very damaging. Always try and add value rather than reduce price, but remember this will only work if the value you add is appreciated by the customer.

Price cutting directly damages the bottom line of the business, but it can also change the customers’ perceptions of your quality and it certainly introduces the expectation of lower prices next time.

Look at this example:

A company selling a product normally priced at £100 wants to increase sales or respond to a lower price competitor. They decide to reduce prices by 10 per cent. If you assume that the direct costs of this product were £50, you can see the effect on the bottom line.

Before
After a 10 per cent price cut

Price
£100
£90

Production cost
£50
£50

Margin
£50
£40

Note a 10 per cent price cut reduces margin by 20 per cent.

The alternative

Another option is to add value. Consider giving away a small gift with each purchase. For instance, if you own a deli, offer customers a free coffee with every purchase over £20. Ideally, you are looking to offer benefits valued by the customer which are relatively cheap for you to supply.

Adding value

If we add 10 per cent value we now have:

Price
£100

Direct costs
£55

Contribution to fixed costs and profit
£45

In this instance our direct costs have increased by 10 per cent as we have added 10 per cent more to the product, but the bottom line has not changed by as much.

This is because the extra value perceived by the customer is made up of direct costs and contribution.

So the supermarkets’ three-for-the-price-of-two is less costly than 50 per cent off the price, but judged by the customer to be of equal value. As an added advantage, the customers’ perception of quality and expectation of price remains unaltered, whilst they may tell friends about the great offer or extra service you provide.

Back