Are you still lowering prices to capture market share?

Lowering prices is one of the oldest and quickest strategies to gain a larger market share.

In recent times, as venture capitalists and other investors have pumped money into tech startups, in hopes that they’ll be the next Facebook, Amazon or Apple, an arguably unsustainable way of working has gained traction — that of valuations and fast growth of market share; but at what cost?

Here’s the innate problem with tech startups — or any new company for that matter — they can be copied a lot more easily. Patents do prevent this to a certain extent, but one needs serious fiscal power to hire legal experts who can argue and win in court. Without it, it’s highly competitive.

However, the one advantage startups have is that of network effect. Many people can make a better Facebook, a better Uber, a better Amazon, a better KFC; the tricky part is to get people to come on to the next platform after they’ve already been using and are comfortable with the current one.

And in order to promote their “better” product and entice customers to switch, they reduce prices — which is a great strategy only if used in moderation. For example, Ola lowered the cut percentage they received per ride when they entered the Australia market, effectively undercutting Uber’s dominance; and at least before Uber’s acquisition of Careem, ride discounts were commonplace in the UAE.

How the market has reacted to these price wars is evident in the change in customer behaviour. People have become a lot more price sensitive. Although there are many other factors that have played a role in this change, offers and discounts have certainly enabled it.

Now the issue is majorly two-fold: one, the customer wants lower prices that they have become accustomed to, and the second is they are inundated with choices in certain segments such as F&B.

So how do companies address this? One of the ways is to provide quality and not reduce prices for most of the year. Bose does this, it almost never has discounts or offers running, however the quality of its products are enough to get customers through the door.

However, when you see your competitors running discounts and gaining customers, depending upon your product category, business model and USPs, running good offers and discounts in small bursts is great to allow people to try out your product, get to know your brand and witness quality.

Once they do see the quality you provide over the others, the USPs they receive, even if they are simply better customer service, they’ll feel more comfortable spending a little more money on your products.

Discounts and offers are a strong strategy to gain market share. However, as we’ve seen with Uber, WeWork and a host of other startups running in losses, it can pose a huge challenge in the path of profitability to change customer behaviour towards paying more for the same products.

Discounts and offers are a strong strategy to gain market share. However, as we’ve seen with Uber, WeWork and a host of other startups running in losses, it can pose a huge challenge in the path of profitability to change customer behaviour towards paying more for the same products.

You might think that if you gained enough of the market share, the scale itself will make you profitable. And this might be the case in many companies. However, what will you do when the next new startup comes into the market with a better product, wanting to gain a larger market share and doing so with lower prices?

At that point, your company needs to be strong enough to have a huge network effect, much like Facebook (no matter how much people dislike Zuckerberg). Moreover, your company needs to be constantly improving to provide better services to its customers to hold on to its competitive edge.