At the heart of value, lies the price/performance ratio, a measure of how much performance you offer for each unit of price. If you deliver more performance, at a similar or lower price than your competitor, you become the value leader. Similarly, if a competitor drops its price, with no diluation in performance, it has the opportunity to take the lead.
Of course, price/performance can become an unending game of cat-and-mouse, as competitors one-up each other through unending twists of the price and performance levers (the wireless industry is famous for this).
Few marketers find this game fun to play. Kmart’s disastrous attempt to overtake Walmart on price illustrates the challenge of trying to win this game on the value leader’s terms.
To effectively compete, marketers may instead downplay or even abandon some market segments. British Airways for example, when challenged by low cost providers, easyJet and Ryanair, put more emphasis on its long-haul routes, where lower-cost players don’t compete; less on the short haul routes where they thrive.
If you’re in a British Airways type of situation, you can follow the same strategy.
This course of action doesn’t preclude you however, from competing on price. But – if you decide to do this, do it through a subbranded, low-cost operation, but only if it makes your existing business more competitive. Also, the new business should derive a distinct advantage through its association with your primary brand. Examples include ING (and ING Direct), Royal Bank of Scotland (Direct Line Insurance), Mercedes (C Class). In these examples, the low-cost option was designed and launched as a moneymaker in its own right (albeit, bolstered through brand association), not just as a defensive play.
Read more about this type of strategy in Nirmalya Kumar’s HBR piece: Strategies to Fight Low Cost Rivals.