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Telecom Industry Price Wars – Short Term Gains, Long Term Damage
Published Jan 27, 2013
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The thriving market for mobile services is intensely competitive. Operators are constantly offering new promotions, enticements, and other marketing “hooks” to attract new customers and capture share from competitors. As the major differences between the various products and services available on the market decrease, operators inevitably start to reduce their prices. This is precisely how a price war begins. While these wars can initially alleviate the pressure on targets and quotas, management consulting firm Booz & Company has found that, ultimately, they leave both the aggressor operator and the market considerably worse off. Operators should therefore try – relentlessly – to prevent a price war. However, if this proves to be ineffective, Booz & Company offers four crucial steps to winning the battle.
AN INADEQUATE QUICK FIX
From the outside, price wars appear to offer positive results. The ramifications, however, run much deeper. “Price wars promise much at the outset, but yield little in the end: at first, gross additions strongly jump as customers shift to another operator. Soon after, the ‘winner’s’ network capacity is tested as traffic rises and the quality level decreases. In consequence, ‘losers’ have to redouble media expenditure and offer incentives to lure their customers back. This, in turn, forces the ‘winner’ to follow suit and spend more to survive,” said David Tusa, a Partner with Booz & Company.
Booz & Company’s study of six developed and emerging markets during price wars – spanning Asia, the Middle East, and Europe – demonstrates that the net effect is a substantial loss in market value.
“The example of the Middle Eastern market tells an eloquent story: the market before the price war should have reached 79 percent of potential value. However, the price war depressed value to 74 percent,” explained Abhijit Navalekar, a Principal with Booz & Company.
TACTICAL RESPONSES
So, how should today’s marketing directors and their CEOs react when a price war threatens? To answer this question, Booz & Company presents four tactical “plays” and one “no-go area,” – which together offer marketing direc¬tors the ability to “avoid if you can, win if you can’t”.
Play 1: Sword Waving
This method is a pre-aggression deterrent that postpones conflict by signaling the intent to win without engaging. In this strategy, non-aggressor operators use credible threats to draw attention away from an imminent war.
• Messages and tools: Sword Waving looks at the whole market and its messages can highlight the value delivered in service propositions in order to distract from the instigator’s price offers.
• Capabilities: The key capability is to understand how actions in response to imminent aggression will affect market segments.
• Target outcomes: The best outcome from a non-aggressor’s standpoint is that the attacker retreats.
• Value implications: The Sword Waving approach comes more naturally to established players as they are not likely to jeopardize their reputations for a short-lived pricing advantage.
Play 2: Surgical Strike
A Surgical Strike responds to another’s aggression and seeks to limit the damage and picks the terrain for conflict.
• Messages and tools: Surgical Strike has a narrow audience and its messaging is highly targeted and focused on value. In effect, the operator joins the price war, but controls its impact.
• Capabilities: Precision targeting and effective delivery of marketing messages are the key capabilities.
• Target outcomes: This play increases value extracted from a specific market segment, resulting in enhanced customer loyalty.
• Value implications: The Surgical Strike is mainly used in developed countries.
Play 3: Capture and Keep the Hill
The third play involves join¬ing the price war with an aggressive counterattack. Capture and Keep the Hill limits the scale of engage¬ment while ratcheting up the level of intensity.
• Messages and tools: Its messages are focused, enduring and most effective when applied to a segment that is not overly price-sensi¬tive.
• Capabilities: Capture and Keep the Hill requires disciplined management capabilities to support the obstacles that will interfere along the way.
• Target outcomes: This plan can apply to all markets.
• Value implications: With this technique, players can gain market share of value in specific sections – even though their total market share may suffer.
A NEW WAR-FIGHTING MACHINE
The fourth play is fundamentally different. “The aim is to become a new war-fighting machine thanks to a radically-improved cost structure,” said Navalekar. “The operator sets out to acquire a structural cost advantage that can be leveraged into a superior, sustained price position.”
Capabilities of the New War-Fighting Machine
With the New War-Fighting Machine approach, the operator develops a new capability set and a clear competitive advantage based on three structural elements:
1. Organizational restructuring: This includes functional con¬solidation and outsourcing to create syner¬gies and cost benefits prior to outsourcing on a larger scale.
2. Process reengineering: This comprises the design of back-end processes, simplification of customer processes as well as delayering customer segments and simplifying product offerings and propositions.
3. Rigorous operating expenditure reduction: This involves efforts to lower operating costs across multiple dimensions.
Value Implications
A radically lean cost structure results in improved margins and provides opera¬tors with the mobility and flexibility to make calculated pricing choices that influence the structure of the market.
To conclude, price wars are value-destructive; yet, they are also controllable, and sometimes even avoidable. Operators must respond with any or all of the three tactical price plays, which – if executed properly – will see them through the war and can even curtail the length of the conflict. In actuality, however, the best option remains that of the structurally-advantaged reformu¬lation of an operator’s business model by means of a drastic change in its cost structure.
Posted by
VMD - [Virtual Marketing Department]
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