The Strategic Rationale for Expanding Your Product Portfolio to Serve More Price-Sensitive Segments
Various market pressures can lead business-to-business (B2B) companies with premium offerings to expand their product portfolios into more price-sensitive segments. However, launching a lower-priced offering to meet the needs of a dynamic market is an endeavor ripe with challenges. It’s important to fully understand and agree on the strategic rationale for heading down this path, as well as the key considerations and challenges that must be understood and overcome, to execute successfully.
A B2B company’s decision to expand its product portfolio to serve more price-sensitive segments most commonly results from:
- The market shifts to reveal new or underserved customers who demand a similar product at a lower price point
- While a company’s traditional, premium customers may be satisfied with the higher-priced, flagship product offering, a new segment of customers with a similar, yet distinct, set of needs is discovered. These customers place less value on the specific features and benefits of the premium offering and are willing to pay a lower price for a more simplified version of the product or service.
- A need emerges among existing customers for a new, lower-priced offering for use in other applications
- Through their own innovation and product management, B2B companies may identify ways to position a new offering that can be used in other applications. This results in a lower-cost offering that still provides critical aspects of value. This may lead to two versions of the offer, one that is de-featured yet still good enough to lower total costs and reach more applications, and a full-featured offer which provides premium benefits to those who will continue to use the product in key applications and pay for these benefits. In this case, a company must beware of cannibalization of its premium offer and ensure that each version of the offering is appropriately positioned and targeted.
- A low-cost competitor and/or new entrant threatens to steal market share
- The entrance of a lower-cost competitor can lead companies with premium product portfolios to consider competing in price-sensitive segments. They may experience some of their more price-sensitive customers being picked away by this competitor and feel they need to respond. These companies may realize that their premium offering is competing directly against a competitor’s offering, and to protect their brand, premium position, and premium prices, they believe developing an offering for price-sensitive customers is the best solution to compete more directly with a new entrant.
- A lack of differentiation and/or customers’ perceived value results in commoditization of a premium offering
- Over time, differentiated premium offerings become commoditized. Competitors enter the space and match features, benefits, and value, seeking to capture a portion of the healthy margin that had been created and captured by the differentiated premium offering. Technological advances can make yesterday’s premium offering nothing more than the base expectation from customers within a few years, or even months. Once features, benefits, and value are equivalent across offerings from competitors, customers in the marketplace will make their decisions solely on price.
- High share in a premium segment leaves little-to-no headroom for growth
- Often premium segments of the market are relatively small and can be dominated by either fewer buyers who are willing to pay premium prices or fewer applications that require the benefits and value developed for the premium offer. Once a B2B company providing a premium product or solution achieves a dominant share position in a premium segment, growth will stagnate.
In the white paper, Look Before You Leap: Product Portfolio Strategies for Price-Sensitive Segments, we provide further explanation of the common strategic rationales and present two case studies to demonstrate how firms have made the decision whether to expand their product portfolio, revealing best practices for addressing inherent obstacles.