How to Fight Off Fast-to-Market Low-Cost Competitors
It’s a well-known fact that companies who achieve success with high-value products are inevitably faced with lower-priced competition.
This trend has been pervasive across numerous industries and follows a familiar lifecycle. An innovator develops a new product or product category, builds demand, and becomes the unquestioned market leader. But then a new entrant comes along, creates a similar product at a lower cost which is seen as “good enough.” That product is adopted at the lower price point and the new challenger inevitably takes market share from the established leader and its channel players.
Recently, this pattern has evolved where companies, primarily from Southeast Asia, China, and other emerging markets have successfully entered the market with lower prices yet similar products.
We’ve seen this with B2B clients that produce power equipment for telecommunications networks or supply small horsepower engines for lawn and garden equipment, as well as manufacturers of power tools for carpenters, contractors, and other technicians. Well-known examples include Nokia and Ericsson, who ceded their market leading telcom network positions to Huawei, and TTI, which gained significant power tool market share at the expense of historical leader Stanley Black and Decker.
What is Changing?
The speed at which B2B suppliers face disruption from low-priced entrants is dramatically increasing. This is due to the popularity of business customers purchasing directly from online providers. In the past, it took years from when a supplier introduced a new product or category innovation to when low-end competitors disrupted this market. Today the innovation to low-end disruption cycle can be measured in months.
In addition to an online presence, channel consolidation is also changing the power dynamics, shifting control away from manufacturers to the channel players. The growing market power of these channel players – whether they are purely online, brick and mortar, or a hybrid – enables them to source directly from low-cost providers and use their own marketing powers to sell the products. This is a similar phenomenon to when in the early 2000’s big box home improvement retailers such Home Depot, Lowe’s, and others built their businesses to become a “branded channel.” They offer wider product assortment at more locations and have scaled up to access many more local customers. With greater brand recognition, these channel partners gain negotiation leverage to successfully introduce low-priced products that compete with the branded market leader.
What is New Today?
Today, we observe online players following this same path, but the difference is the accelerated pace. They’re now amassing power by offering price transparency to B2B customers. Yet, even when faced with this problem, many established B2B manufacturers haven’t quickly recognized and responded to these disruptive online trends. This could be because much of the activity is untracked, unrecognized, and may not even be adequately measured by traditional trade associations and research firms. Additionally, pricing in the digital environment has become incredibly dynamic, changing in response to market trends and customer activity. As pricing information has become more available, customers have the ability to instantly compare prices and products. Some online suppliers are even able to revise pricing daily or hourly using algorithms to quickly adjust to demand.
Retailers like Amazon Business and Alibaba have accelerated the shift of power by using their online marketplaces to scale up, win more volume, and take a larger share. The online model opens customers to tremendous product variety, because the online provider sells its core products while rounding out their offerings with fulfillment service for 3rd party sellers. With this model, everyone wins: the online marketplace is the branded channel and makes money with marked-up product or by earning 3rd party fulfillment fees. The customer can then search the online site for better product information, price comparisons, and simplified business transactions. Plus smaller distributors and dealers who offer specialized products now benefit by gaining access to more online customers and using the provider’s fulfillment services.
Responding to Change
In order to recognize the disruption quickly and act appropriately, B2B suppliers must:
- Pay closer attention to the marketplace, noting that much of the online activity is ‘off-book’ and will be invisible to their normal channel data sources
- Actively manage the channel to ensure chosen channel partners are strategically aligned and ‘noise’ from unauthorized activity is minimized
- Stay vigilant. Even market leaders are susceptible and must stay on top of the latest product, pricing, and channel trends.
In today’s ever-changing marketplace, leading manufacturers in the B2B space cannot sit back and assume their position is secure. The rapid pace of change and transparent pricing allows new entrants to move in quickly, take market share, and threaten the leaders’ position. Active and continuous monitoring, through traditional and non-traditional channels is absolutely necessary to keep your organization ahead of the curve. Only then will you have the ability to maintain or grow your position whenever new channel dynamics arise.